
SEC moves toward allowing crowdfunding IPOs - antoviaque
http://www.usatoday.com/story/money/business/2013/10/23/crowdfunding-ipo-sec-jobs-act/3169395/
======
gbelote
I'm really excited that we've made it to this point. The implementation of the
full JOBS Act has been on the horizon for over a year and I think it has a lot
of potential to do good.

That said, I'm nervous about overzealous regulations. There are a few ways
this can create severe enough adverse selection that healthy, high-caliber
companies will avoid raising from the unaccredited crowd.

I'm still reading the details in the 585 page PDF of proposed rules but some
concerns come to mind:

    
    
        - Capping the whole round to $1m
        - Forcing unnecessary financial disclosures
        - Inability to use a single purpose fund for aggregating small investors (forcing every unaccredited to be a direct investor)
    

I believe these are all feel-good but destructive rules that will poison the
unaccredited crowdinvesting ecosystem. At Wefunder we've learned a lot about
what it takes to get high caliber startups to use our platform and I'm pretty
confident that those three things can each be deal breakers.

If you're a part of the startup ecosystem I encourage you to pay attention to
this law, get informed, and give the SEC your feedback. These are only
-proposed- rules and the SEC will listen and adapt (at least, they have in the
past). Someday you may want to raise money or invest in a company!

~~~
7Figures2Commas
Healthy, high-caliber companies are far less likely to want anything to do
with the unaccredited crowd anyway. Most will continue to raise capital
through Reg D Rule 506 offerings, and 506(b) offerings specifically given the
uncertainty around the proposed rules associated with 506(c).

It sounds like you basically want Rule 506 offerings without the accredited
investor requirements. Debate over the wisdom of that notwithstanding, this
was never the intention of the crowdfunding portion of the JOBS Act to begin
with.

~~~
gbelote
That's what many critics said before 506(c) but that's not how the market is
behaving [1]. There's more value to a crowd of investors than easy dumb money,
and I don't see why the personal wealth of an investor really matters.

I disagree with your interpretation of the intention of the JOBS Act. As I
interpret it it's meant to allow all Americans the opportunity to invest in
startups and small businesses while protecting them from losing all their
money. Introducing regulations that cause severe adverse selection outweighs
the benefit of those specific rules, in my opinion.

[1] I think the quality of companies raising publicly on Wefunder and
AngelList speak to that, but I'm heavily biased. I respect your opinion even
though I disagree with it. :)

~~~
7Figures2Commas
Obviously "healthy, high-caliber" means different things to different people.

As for how the market is behaving: I have personally heard several attorneys
state that they're advising their clients to be very cautious about Rule
506(c) and according to media reports[1], this is the advice of many
attorneys.

I am aware that companies are relying on Rule 506(c) for offerings on
AngelList and services like yours, but in terms of the overall market for
Regulation D offerings, this is a still a small number.

> I disagree with your interpretation of the intention of the JOBS Act.

You cited the $1 million cap as an example of a rule that is of concern to
you. To my knowledge, this cap was an explicit part of the bill that Congress
passed. As such, I don't see how the SEC could eliminate that restriction.

[1] [http://www.crowdsourcing.org/editorial/ban-on-general-
solici...](http://www.crowdsourcing.org/editorial/ban-on-general-solicitation-
lifted-but-caution-prevails/28964)

~~~
gbelote
> Obviously "healthy, high-caliber" means different things to different
> people.

That's true, there's definitely subjectivity here. I make the assumption that
YC companies are a proxy for "healthy, high-caliber" startups and my opinion
of what will be deal breakers for that category of company is shaped by our
customer development in the YC network. I could be wrong for a few reasons.

> As for how the market is behaving: I have personally heard several attorneys
> state that they're advising their clients to be very cautious about Rule
> 506(c) and according to media reports[1], this is the advice of many
> attorneys.

Indeed. I think there's a natural lean for attorneys to be more conservative
and wait for things to play out a little. I believe that in the next year or
two it will be commonly accepted, I've already seen a lot of attitude change
over the past year. We'll see. I think this is something startups ultimately
want - assuming all the concerns can be addressed. More fundraising options
and a wider pool of value-add investors is a good thing if crowdinvesting can
be done practically, IMO.

> You cited the $1 million cap as an example of a rule that is of concern to
> you. To my knowledge, this cap was an explicit part of the bill that
> Congress passed. As such, I don't see how the SEC could eliminate that
> restriction.

I did, in the 585 page document the SEC released they suggest a few
adjustments to address the concerns people have. For example, the $1m limit
might be applied to the fees collected by the funding portal.

------
MWil
To make a public comment: [http://www.sec.gov/cgi-bin/ruling-
comments?ruling=s70913&rul...](http://www.sec.gov/cgi-bin/ruling-
comments?ruling=s70913&rule_path=/comments/s7-09-13&file_num=S7-09-13&action=Show_Form&title=Crowdfunding)

------
31reasons
The whole limit on how much you can invest looks silly to me. When it comes to
investing in high growth startups, government thinks : "Poor people are dumb
and we need to protect them from their own mistakes".

Where was this rule when greedy banks sold them expensive mortgages ?

~~~
7Figures2Commas
> Where was this rule when greedy banks sold them expensive mortgages ?

Uhm, the government _encouraged_ much of the mortgage lending you're referring
to. The loans themselves were artificially cheap. Unfortunately for borrowers,
the houses were not.

~~~
InclinedPlane
A lot of people thought those high risk mortgages were win/win. Best case
scenario: the mortgage gets paid back at a healthy RoI. Better case scenario:
the borrower defaults and the mortgage owners end up with real estate that is
getting more valuable by the day.

Of course, the borrower gets screwed but who gives a shit about them. And if
the housing market tanks the whole thing falls apart, but the market can only
go up, up, up!

~~~
7Figures2Commas
Your understanding of how mortgage-backed securities work is flawed. MBS
holders have no control over how the collateral backing their securities (the
houses themselves) are dealt with in a default. The servicers of the MBS are
responsible for this. In other words, no investor buys MBS with the
expectation of owning houses because that's simply not what happens.

Out of all the "victims" in the housing collapse, MBS investors were arguably
some of the more sympathetic. They were the true bag holders, overpaying (in
the form of lower yields than was justified by actual risk) for lead that
credit ratings agencies assured them was gold. Following the collapse, many
any of them sued, alleging amongst other things, fraud.

On the list of "victims", many but certainly not all borrowers were less
sympathetic characters. Some individuals had no problem lying about their
income, and many others took out adjustable rate mortgages with the incorrect
assumption that they'd be able to flip their homes at a profit or rent them
out when their payments increased. It's hard to see these folks as anything
other than willing participants in the game.

------
walshemj
But the SEC won't allow ordinary Americans to invest in much safer FTSE
flotations for example say the royal mail float that just happened.

Floated at £3.30 now £5.30 in not much more than a week.

~~~
cube13
Is this a SEC problem or a problem with British regulations? I'm completely
clueless on how this works for international stuff.

~~~
walshemj
SEC was my understanding from reading the prospectus.

~~~
jackgavigan
Offering shares to US citizens would have subjected the Royal Mail IPO to US
laws and regulations, and opened the company up to the risk of spurious
lawsuits by greedy lawyers or over-zealous regulators and public prosecutors
seeking a high-profile scalp so they can get their face in the newspapers and
on TV to kickstart their election campaign.

After the "British Petroleum" debacle, what sane company would voluntarily
expose itself to such risks unless it had to?

~~~
walshemj
I think that its UK laws that apply to securities on the FTSE 100 same as if I
hold ATT or IBM I have to abide by US law - and file a wben 8.

Just seems odd that the SEC is fine with people investing in much riskier
start ups than blue chips - arnt they supposed to look out for investors as
well as companys

------
jackgavigan
We've had equity crowdfunding in the UK for a while now. The two platforms I
hear about most often are Seedrs ($3.2m invested) and Crowdcube ($23.3m).

For example, PixelPin -
[https://news.ycombinator.com/item?id=6366343](https://news.ycombinator.com/item?id=6366343)
\- raised $240k at a $2.4m valation:
[https://www.seedrs.com/post_investment/9385#1976](https://www.seedrs.com/post_investment/9385#1976)

------
berberous
For anyone who is curious, here's a link to the (585 page!) PDF of the SEC's
proposed rules:
[http://www.sec.gov/rules/proposed/2013/33-9470.pdf](http://www.sec.gov/rules/proposed/2013/33-9470.pdf)

------
tocomment
I'm trying to figure out what this kind of funding would be good for. Could
you use it to open a restaurant or bar for example?

~~~
michaelt
Kickstarter's Technology category has only 9 projects that have raised over $1
million [1]. None of them requested more than $250,000 and one requested just
$30,000.

In fact the only things I can find on Kickstarter that requested and raised
more than $1 million are films [2]. There's people working on space telescopes
who only requested $1 million [3].

So, I guess this type of funding could be used for the kind of things you see
on kickstarter?

[1]
[http://www.kickstarter.com/discover/categories/technology/mo...](http://www.kickstarter.com/discover/categories/technology/most-
funded?ref=more#p1) [2] [http://www.kickstarter.com/projects/559914737/the-
veronica-m...](http://www.kickstarter.com/projects/559914737/the-veronica-
mars-movie-project?ref=most-funded) [3]
[http://www.kickstarter.com/projects/1458134548/arkyd-a-
space...](http://www.kickstarter.com/projects/1458134548/arkyd-a-space-
telescope-for-everyone-0?ref=most-funded)

~~~
tocomment
Excellent point. So is anyone working on a kickstarter that uses this model
instead?

Would it work like Kickstarter except you'd receive shares of a company? Would
there be a lot of overhead?

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mehwoot
The SEC is overrated and this is the year that they stop being relevant.

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confluence
HAHAHAHAHAHAHAH brilliant! Let's break this dumb idea down shall we.

> _These rules could reinvent the way companies raise money by allowing them
> to bypass the traditional costs of going public, which usually involves
> hiring costly investment bankers and accountants._

So instead of breaking the seat belt monopoly to reduce costs (work with me
here), we'll just make it so that kids no longer have to wear seat belts
anymore. It's absolutely brilliant in its sheer audacity. You get to keep your
campaign contributions from the rent-seeking financial cartels, whilst
simultaneously providing VCs with their retail lambs for the slaughter. The
fact that they do this, whilst selling the idea as a positive act for the
public has me slack jawed. That takes balls.

> _Congress is looking for a loophole to allow smaller companies to get an
> exemption from the strict rules controlling the sale of securities to
> individuals. Congress is hoping that by using Internet crowdfunding, small
> and promising companies could gather capital needed to grow and expand from
> a wide pool of investors._

So we invent seat belts, and people stop dying. After a while people forget
why we had seat belts in the first place. Let's take away the seat belts,
because look, no one has died in a really long time.

Furthermore, why on earth would MORE risky companies need LESS disclosure.
That makes no sense. If you were thinking halfway straight, you'd realize that
it's the small ones that are the most subject to corruption, pump and dump
scams and extensive stock promotion. Penny stocks CLEARLY indicate that this
is the case. We need MORE disclosure not less. Costs are entirely derived from
the IPO cartel. Break that you morons. Oh wait, you can't, because 20% of next
year's campaign contributions come from your financial bosses.

> _With the new rules, the SEC is looking to open the concept of crowdfunding
> to the public, while still offering investor protection. The new elements of
> the rules would cap any company 's ability to raise money through
> crowdfunding to $1 million every 12 months. For investors with an annual net
> income or net worth of less than $100,000, every 12 months they can invest
> up to 5% of that, or $2,000, whichever is more. Those with an annual income
> or net worth exceeding $100,000 can invest up to 10% of that every 12
> months. Securities bought through portals would have to be held a year
> before being sold._

Good luck regulating this. Capital limits are always exceeded by the
determinedly stupid.

~~~
streetcat
Two things:

1) I would assume that you can invest at the same level of risk at existing
public company (e.g. micro cup, or investing in options), the this point is
mute.

2) core pillar of modern finance is portfolio theory . I.e. how to mitigate a
specific company risk by investing in portfolio of companies (which is what
VCs are essentially doing). Hence, this would also imply here (regardless of
the amount of audit employed). So really a risk of a single company is a non
issue.

~~~
confluence
Two things

1) Those are esoteric. People don't do them. However the dotcom boom shows us
that they will fund bullshit stock issues.

2) MPT is bullshit. Systems fail in a cascade fashion, not independently.
Furthermore investors do not diversify.

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wissler
Call my cynical, but I don't think they are going to allow the peons to move
in on their action. If I'm wrong, fantastic!

