

SEC considers letting startups use social networks to raise money - Lukeas14
http://venturebeat.com/2011/04/09/sec-considers-letting-startups-use-social-networks-to-raise-money/

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asanwal
Our startup's office used to be next door to what is affectionately called a
"boiler room". These guys would essentially prey on old people and other
vulnerable folks with various schemes related to penny stocks. And we'd hear
the stories through the walls in this crappy office, in the elevators, etc.
And it generally consisted of someone losing money (the client) and the boiler
room scumbags making money.

And so while I'm all for free markets (my own startup's business is sort of
predicated on it) and I do think that changes to the SEC rules should be made,
I do worry about making this open season because the scumbags out there will
find a way to take advantage of the opportunity quickly and at scale. That is
what unscrupulous folks do, and they do it well.

Also, when it comes to tech investments in particular, even Fred Wilson says
the best VCs bat .300 and the legends bat .400. That means many of the pros
also bat .100. I don't know how Joe Public is going to be able to do this well
when the professionals cannot.

Sure, we can say the SEC needs to regulate to ensure this doesn't happen, but
as evidenced by our last crisis, that wasn't possible to do for multi-billion
dollar organizations. I'm not sure they'll be able to do much for Aunt Sally
who lost $10k on the Quora for Pets that she was convinced would be huge by
some smooth talking cat with a slick PowerPoint.

This comment may go against the ethos of HN (and result in lots of downvotes),
but I think there are some downsides if they go too far in opening up the
market.

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nopassrecover
I'm not sure why it's socially acceptable to convince people to part with
their money for things they don't need, or to risk their money in games of
chance, but not to encourage them to invest in the potential of an idea.

If the problem is misrepresentation of what they are investing in then there
are already laws to protect against this, just as there are laws (at least in
Australia) protecting consumers from false advertising or spurious sales
claims.

~~~
asanwal
I do agree in theory. But just because people can be fooled into wasting their
money in other ways doesn't mean we should encourage it in new ways.

That said, I'd be all for this if the laws worked. The reality is that
although criminals, if found, may be prosecuted, the victims of these crimes
rarely (can't think of one case) get their money back. The unscrupulous types
will blow it on fancy cars, homes, and a lavish lifestyle which means what
goes in rarely is left when the legal system takes its course.

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nikcub
About time they dumped these rules. They are old and archaic. Companies should
be allowed to raise money from whoever they want, and people who aren't as
fortunate as 'qualified investors' should be given the opportunity to invest
in high-growth companies. It would level the playing field a bit - rather than
keeping all tech growth gains in the hands of a select few.

The solicitation portion of it is mad, our lawyer previously told us not to
even mention on our website or blog that we are raising money, incase it is
misinterpreted as public solicitation.

This is all that is holding Kickstarter et al back from running full
fundraising rounds.

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rmah
This is huge. If the SEC provides another exemption to Reg. D for crowd
sourced funding, it could usher in a new age of financing for startups not
just in the tech space but in all sectors.

I am a bit concerned that some unscrupulous people will use it to scam money
out of naive "investors" through the use of crowd source financing services.
The SEC would not have the resources to investigate at this scale. And I have
doubts that local law enforcement would pick up the slack.

But even with the fraud risk, I believe this would be a net positive and lead
to a lot more creative ventures.

~~~
cabalamat
> I am a bit concerned that some unscrupulous people will use it to scam money
> out of naive "investors" through the use of crowd source financing services.

This is bound to happen, but it shouldn't stop the scheme from going ahead.
Investors should be sensible enough not to risk more money than they can
afford.

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BerislavLopac
In my opinion it would be a serious mistake to ease the current restrictions
for investors; indeed, it might be even smart to raise the bar a bit instead.
Money is a sensitive matter, and allowing everyone to invest in startups will
only have negative effects for everyone involved.

For one, this is laying the ground for a new bubble. Startups are inherently
risky, and you'll end up with a lot of small investors blowing up their
savings on the gold rush of overblown valuations.

Second, one of the greatest effects of current rules is that most of the funds
available to startups are the "smart money", i.e. they come with experienced
investors (VCs and angels) who add quite a lot of value besides the cash
itself. Small-time investors mostly don't have that added value; not only
that, but by definition their capital will be sought after by inexperienced
founders, who are more likely to fail without proper guidance (as more
experienced ones supposedly have more contacts and mentors available).

And third, even though there is a lot more money available today, there is
still some kind of filtering process before the startups are funded. Hell,
even Yuri Milner doesn't throw his money blindly to anyone who knocks on his
door -- he had relegated the process to the Y Combinator team, so there still
is some selection.

In short, the day this new regulations pass may be marked as the start of the
new startup bubble. Mark my words.

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yuhong
Personally I have been wishing for delivering material info publicly over
social media services like Twitter to be allowed under Reg FD for a while now.

~~~
wmf
Sun made some progress in that area:
<http://blogs.sun.com/dillon/entry/reg_fd_update>

You just need to convince the SEC that Twitter is the new RSS.

~~~
BerislavLopac
Uh, I'd hate that. RSS is a public protocol; Twitter is a private company.
Huge difference...

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gersh
I think there are few things they should do to make this work: 1) Limit the
amount of money per investor for non-qualified investors. If someone only
invests a small amount, they aren't losing all their money on one investment

2) Requires disclosure all of company officers and major investors through an
official SEC filings. Additionally, disclose any criminal record of securities
violations and civil suits relating to misrepresentation and securities fraud
for previous companies

3) Improve SEC enforcement, and be pro-active in going after fraudulent
misrepresentation. Where companies appear to be making fraudulent
misrepresentations, the SEC should prosecute companies that go too far.

