
US Equity crowdfunding is finally here: Steps to getting funded - walterbell
http://venturebeat.com/2016/05/15/equity-crowdfunding-is-finally-here-10-steps-to-getting-funded/
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alva
Hopefully there is stricter regulation in the US in regard to restricting
valuation abuses. Unfortunately in the UK a number of my friends have invested
non-trivial amounts into crowdfunded equity.

When I looked into them in detail, it was clear that not only were the
valuations completely out of whack but that the T&Cs were equally ridiculous.
Most of them will either lose all their money or be stuck with equity that
they paid far too much for and more importantly, can't sell.

Be very, very careful and take the time to read and understand all of the
provided legal documents. If it is anything like the UK offerings, it would be
wise to stay away.

edit: Just for example, many UK crowd-funding offerings will have had
investment from VCs etc the week/month before at 1x, the price being put
forward to the public 5x-15x.

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strommen
A few people are wondering about regulations and oversight. Here's a brief
summary for this law:

* Max $1 million total fund-raising

* Max $2,000 or 5% net-worth from each unaccredited (i.e. non-rich) investor

* Must file audited financials with the SEC to start, and every year afterwards

* Must use a registered portal, which must be a different entity with different owners

Getting your financials publicly audited every year is a major pain, and I
think it's going to make this non-viable for most companies.

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howlingfantods
No requirement for audited financials, only reviewed financials by a CPA.
Which makes this stuff all the more risky.

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strommen
Apparently it depends on if you're raising over 500K [1]:

"A company offering more than $500,000 but not more than $1 million of
securities relying on these rules for the first time would be permitted to
provide reviewed rather than audited financial statements, unless financial
statements of the company are available that have been audited by an
independent auditor;"

[1]
[https://www.sec.gov/news/pressrelease/2015-249.html](https://www.sec.gov/news/pressrelease/2015-249.html)

~~~
howlingfantods
I don't mean to be rude, but if you read the quote you posted, it directly
contradicts your point. Specifically "permitted to provide reviewed rather
than audited financial statements." Of course if a company already has audited
statements, they have to submit these more rigorous audited statements.

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howlingfantods
There seems to be serious moral hazard for equity crowdsourcing.
Realistically, potential investors don't have to ability to conduct adequate
due diligence. The projects seeking funding are likely to be riskier/lower
quality since high quality projects will probably pursue traditional VC/angel
financing (less hassles, reporting requirements). In the end, you have
uninformed investors betting on high risk projects where the entrepreneurs
lack any real supervision from said investors.

~~~
dforrestwilson
As opposed to all the shady penny stocks floating around out there?

Here are two companies that have been playing ignorant stock market investors
for years:

[https://www.google.com/finance?q=NASDAQ%3AORMP&ei=D6w5V5HNKo...](https://www.google.com/finance?q=NASDAQ%3AORMP&ei=D6w5V5HNKoPFePfMq_AG)

[https://www.google.com/finance?q=NASDAQ%3AANGI&ei=Faw5V-iPJ5...](https://www.google.com/finance?q=NASDAQ%3AANGI&ei=Faw5V-iPJ5bnerirr5gN)

There are literally thousands of fake or terrible biotech and tech companies
in the supposedly highly regulated public markets. Base yourself in Israel or
China and list on the NASDAQ. Pay someone to publish a bullish article on your
blog, wait for buyers, and then dilute. You can have a field day and nobody
will bother you.

My point is that investors cannot and should not be protected. Educated? Yes
please.

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vosper
In what sense is Angie's List either a penny stock or a scam? How are
investors being duped?

I'm just curious because I've seen a few ads for Angie's List and they have a
$500m market cap.

~~~
dforrestwilson
The new management team could be better than the old, but the former CEO set
up some favorable leases between ANGI and an office building which he and some
board members owned.

There were a few other egregious things, but this was the worst. I guess I
wouldn't call ANGI an outright scam, but it's certainly shady.

~~~
vosper
Ahh, thanks. So it sounds like it's probably not in the same class as the
pump-and-dump "XYZ Corp is about to blow huge!" penny stock shams that are out
there.

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technotony
Their estimate of the portal fees of 7-12% is wildly wrong. WeFunder[1], a YC
company, is charging 3% and there are several others at 5%. [1]
www.wefunder.com

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codecamper
What is to prevent someone from gathering some money to create a business that
will only provide a revenue stream. Let's say I have no intention of going
public, or selling the company.... just raise some money & then run the
company.

Can an equity fundraise be offered with a plan to distribute the correct % of
earnings to investors?

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Dwolb
I don't think this is exclusively an issue with crowdfunding. For example,
this issue exists in the public markets. Both Amazon and Google have never
declared nor paid dividends.

As an equity holder in these scenarios, you do own a share of the underlying
assets, but are unlikely to see any distributed cash flows.

~~~
suresk
The important distinction being, I can sell my shares of Amazon or Google
almost instantly on the open market. The same cannot be said for a company
that chooses to remain private.

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thirru
As a founder the biggest turn off for me is the fact that you cannot take on
more than 500 non accredited investors. As soon you exceed that number and
rake up $25M in assets you will be forced to go public, which is absolutely
bonkers.

Now to me equity crowdfunding is inherently powerful that you can make
investments as little as $100. This dramatically lowers the risk, and makes it
a small gamble for small time investors. But as an entrepreneur with a max of
500 investors you end up with a mere $50k, which almost defeats the effort for
most startups.

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waylandsmithers
This sounds like a terrible idea. From the founders' standpoint, you are
presumably getting nothing other than cash. Doesn't the best investment money
also come with expertise and guidance?

From the investors' standpoint, these are going to be the absolute riskiest
plays on the planet, yet professionally produced kickstarter videos will make
them think product is just about to roll off the production line once they
have enough money.

~~~
thirru
You are discounting the power of small investors. There is a good chance that
your unaccredited investors altogether will cast a larger network than your
VCs. Also if done right they could become super fans and the best possible
promoters of your product. They definitely bring something to the table, but
it will be somewhat different than what you'd expect from a YC.

~~~
rdlecler1
This is seed stage, seed stage investors, even VCs, are making a lot of bets
and generally don't have time to work with the company to add much value.
Actually our biggest value add investors are also also our smallest.

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client4
My company is participating in the new regulation crowdfund rules via
WeFunder. It's been a more rigorous process than I expected. To raise over
$100,000 we needed reviewed financial information. For an absolutely new
company this would be easy (and a reason to note higher risk for an investor)
but we have been operating for two years, making it a bit more rigorous.

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return0
Shouldn't they impose a limit in the amount of capital that can be
crowdfunded? This sounds like it can lead to wild abuses, at least until
people learn from their mistakes.

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pdabbadabba
There are limits. Under the SEC's new rules it appears that you can only raise
$1 million per year and $100,000 per investor per year through crowdfunding.

Here's a better write-up of the regulations:
[https://www.sec.gov/news/pressrelease/2015-249.html](https://www.sec.gov/news/pressrelease/2015-249.html)

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jonstokes
Sometimes I wish HN let you post images, because this story is what the "seems
legit" meme was invented for :p

At any rate, I'm actually not too worried about a speculative mania developing
right now. The type of people to be taken in by this are too broke at the
moment. The only way this could become a thing is with the introduction of
leverage, and it'll take a while for the financial industry to figure out how
to get people to borrow in order to gamble in this particular casino.

