
Kickstarter, but With Stock - Sharma
http://www.slate.com/articles/business/moneybox/2014/06/sec_and_equity_crowdfunding_it_s_a_disaster_waiting_to_happen.html
======
MCRed
I could go to vegas and drop $40k in cash on the casinos, gambling it all
away. There's nothing to stop me from dong that.

But even with 20 years experience in startups, I can't put $40k into a
startup's round?

Slate would say I need to be "protected" from that?

Sorry, in this case, the regulations that only allow the well connected and
wealthy to invest in startups also serve to keep those with domain expertise
out of the market.

All too often regulations are used to exclude competition. This is one
example.

~~~
SoftwareMaven
Very few people would go to a casino with their life savings with the
expectation of retiring off the winnings. Most people understand the risks
involved (even if they are very poor at understanding the real odds, they
still know they aren't good). Further, casinos would never be allowed to sell
their games that way; gambling is a massively regulated industry.

Now consider a company selling itself. With no rules, they are able to say
anything they want about themselves. The stock market is seen by many (most?)
as an investment, and therefore fairly safe (possibly even _safe_ ). How well
dispersed is the knowledge that, while investing most of your money in the
_market_ is relatively safe, investing it in _one dstock_ is horribly risky?
How easy is it for a semi-reputable (much less disreputable) company to paint
an overly rosey picture, appealing to somebody's hopes and dreams?

I completely agree you should be able to invest. There is a real problem with
how _qualified investor_ is defined today, but I'm not convinced removing that
concept is a good idea at all.

~~~
Htsthbjig
"Now consider a company selling itself. With no rules, they are able to say
anything they want about themselves. The stock market is seen by many (most?)
as an investment, and therefore fairly safe (possibly even safe). How well
dispersed is the knowledge that, while investing most of your money in the
market is relatively safe, investing it in one dstock is horribly risky? How
easy is it for a semi-reputable (much less disreputable) company to paint an
overly rosey picture, appealing to somebody's hopes and dreams?"

I don't know where you extract that there are "no rules" in crownfunding
stock. The stock market is crownfunding by nature. At first NY Stock market
was a tree under which interested people traded part of their companies.

With more than one hundred kickstarter projects backed on my belt, I have been
duped in... ZERO.

They are free to say whatever they want but it is very easy to catch a liar.

Part of my family comes from socialist East Europe economies. In those places
even very smart people like nuclear scientists or very bright philosophers
were protected "for their own good" against taking risks(or doing anything on
their own by the way, good competent people were dangerous if they did good
things because it made the very incompetent look bad).

The only problem is that "protectors" were very Mediocre people, people that
spent their time banging pretty girls and drinking Vodka. Bureaucrats whose
only merit were kissing asses of someone higher in the monopolistic hierarchy
of power.

Let me be a grown up, an adult who takes his own decisions.

------
sillysaurus3
_“We find it very hard to believe that any attractive companies will use” non-
accredited investor crowdfunding_

On any given day, there are millions of English-speaking people on the
internet. If you can capture the hope and imagination of those people, they
will give you money, and the total amount you receive will be significant.
Alternatively, if you can convince a small number of them to give you a large
sum of money (à la Occulus), your result will be the same. This, obviously,
requires the right sort of idea; one that resonates with large numbers of
people, or resonates so strongly with a small number of people that they're
willing to part with hundreds of dollars. But it's quite possible, and I see
no reason why a serious company wouldn't explore this possibility.

On the other hand, after reading some history about the concept of the stock
market, I think legal protections aren't a bad thing. The goal is to protect
uninformed consumers from predatory behavior. It's an important goal, because
no one likes admitting they're uninformed (least of all to themselves) so you
end up in a situation where people are throwing around their nest eggs at
emotional appeals (companies who convince you that they can make your fantasy
happen). It's easy for people to convince themselves they've stumbled onto a
big opportunity, and it's rather easy for them to believe in it so strongly
that they're willing to invest large sums of money; sums they sometimes can't
afford. If their investment disappears, so does their ability to participate
in the economy. The history of the idea of stocks is filled with this sort of
behavior, and sometimes the consequences can be disastrous. Due to information
asymmetry, those tempted to invest in a new phenomenon are usually the ones
least qualified to judge whether the phenomenon will yield returns. Hence,
predatory behavior, and the original motive for protective legislation.

There's a balance to be struck between taking advantage of small sums of money
from millions of people, and protecting those people from dumping money they
can't afford into a new phenomenon. Some tasteful regulation isn't necessarily
a bad thing.

~~~
vehementi
Sibling replier Cyther606, you have been hellbanned and most poeple can't see
your posts unbeknownst to you.

~~~
sillysaurus3
Cyther, it looks like you just made a new account. Since your comment was
autokilled, I'm guessing you're posting through Tor. HN autokills comments
from new accounts if they're made through Tor due to past abuses. If you email
hn@ycombinator.com and include a link to this subthread then they'll mark your
account as legit.

Your comment was good. The autokill was unrelated.

~~~
dang
That is correct. We unkilled the comment.

------
mbesto
How does crowdfunding successfully work in the UK, but not in the US? Having
done startups in both environments, structurally, I don't see much of a
difference.

UK crowdfunding websites for reference:

[https://www.seedrs.com/](https://www.seedrs.com/)

[http://www.crowdcube.com/](http://www.crowdcube.com/)

~~~
sillysaurus3
I'm interested in how many of those investors achieved >1x ROI. Are there any
publicly available stats?

~~~
mbesto
AFAIK no. I know you're not refuting this, but my general point is that in the
UK this system does exist and hasn't created the supposed chaos in the UK that
the US financial authority believes will happen in the US.

------
jonathanjaeger
This whole "controversy" over companies who do Kickstarters and later raise
money (or sell their company) seems overblown. When you're backing a
Kickstarter for these types of companies you're often trying to get the
product as a pre-order. So in addition to a potentially low margin business,
these companies are now supposed to feel inclined to give you -- the customer
-- equity in their company? As a backer, do you want the product or do you
want the equity? They are two completely different ideas that seem to be
conflated in the press. Perhaps all this controversy is fabricated by the
press and not an actual problem.

Kickstarter in particular is about rewards and/or patronage. There is an
avenue for equity based crowdfunding elsewhere, the question is whether there
is a big enough demand on the consumer side (with people who have little
information about the company) and the business side (with founders who don't
want to share equity). I'm not referencing AngelList, but rather companies who
would run Kickstarter-like projects.

~~~
rudimental
If everyone called it pre-ordering and not crowdfunding, I think there would
be less "controversy"/ upset people. (I realize the crowd might be providing
the funding to make whatever endeavor possible, but if it's ultimately pre-
ordering...) the conceptual framework of crowdfunding means you're a part of
something bigger. It taps into the language of start up funding. If a
successful campaign results in the people putting on the project making tons
of money, all you might get is a refund and disappointment. That result is
more palatable if all you did was pre-order something.

Edit: spelling

------
arikrak
> From an investor’s perspective, crowdfunding operates most similarly to
> angel investment. But most crowdfunding investors won’t be able to act like
> successful angel investors. “Successful angel investors invest in industries
> they know well, do a lot of due diligence, spend time mentoring the
> companies they invest in, and diversify their investments,” said Dorff.

A single non-accredited investor may not invest as well as an experienced
angel investor. But the idea is to invest with "the crowd". The funding sites
will help with some of the due diligence, and people will gravitate to the
most promising startups. Instead of providing advice individually, the
crowdfunders will provide group feedback, marketing, etc. And they'll be able
to diversify just like angels, since they'll invest smaller amounts in each
startup.

------
indrax
>Had the backers received company stock instead of company T-shirts, they
would have seen close to a 1,000 percent ROI.

This assumes Oculus would have sold 100% of its shares at a $2 million
valuation, and then still sold again for $2B after the developers had cashed
out.

It's a nonsense comparison.

~~~
sparky
Isn't that for a 1000x ROI? 1000%=10x, so even selling 1% on Kickstarter at a
200M valuation would yield something like that.

~~~
indrax
You're right, but now I'm wondering where the article got a 200M valuation
from...

------
marme
A lot of people dont realize that that you can begin trading stock OTC by just
filling some paperwork with the SEC though lawyers fees for that paperwork are
not cheap. You can do what is called direct public offering and directly sell
your stock without using an exchange aka over the counter. Many people refer
to these stocks as penny stocks and the OTC market as the pink sheets. What
these new laws are trying to change is the way you register to sell OTC and
the people you are allowed to sell to. The real problem is that just like no
one trusts penny stocks and the otc market no one is going to trust
crowdfunded stocks. They are going to be full of scams and pump and dump
schems. Just look at the movie wolf of wall street for an example of the kind
of scheming that goes on in the otc markets

------
gavanwoolery
Let's get one thing straight - the SEC "worrying" about fraudulent behavior in
crowd-based equity is laughable.

Yes, fraud can happen in crowd-based equity - that's not what I'm talking
about though.

What is laughable is that the one thing the SEC is supposed to monitor (the
stock market) is the single biggest fraud perpetuated on the American people.
It is where young, naive people like myself put their life savings only to
have it crushed by people who were richer than me, who could generate volume
on whim, perform insider trading while not worrying about the consequences,
and take bailouts from a government that milks the rest of the population for
taxes. I'll honestly be damned if the SEC isn't in the pocket of those who
would benefit from it.

~~~
sillysaurus3
Have you written about your experiences anywhere? I'd be interested in hearing
specifics.

~~~
gavanwoolery
I've probably written about it a few times in various comments, but the
essence of it can be found here:

[http://blogmaverick.com/2010/08/20/the-stock-market-is-
still...](http://blogmaverick.com/2010/08/20/the-stock-market-is-still-for-
suckers-and-why-you-should-put-your-money-in-the-bank/)

and here:

[http://blogmaverick.com/2008/09/08/talking-stocks-and-
money/](http://blogmaverick.com/2008/09/08/talking-stocks-and-money/)

(I don't always agree with Mark Cuban, but most of what he says here seems
pretty sensible).

As far as investing goes, I always seemed to be pretty "good" \- or at least,
lucky. It was not unusual for me to make a few thousand dollars in a week (and
occasionally lose a little). I typically never invested in very risky
prospects, always things that I knew would be around for quite a while like
Google and Apple.

I made the foolish mistake of investing in Freddie Mac and Fannie Mae,
companies that were once labeled "too big to fail" (and now trade OTC, if at
all - have not checked since they became junk). Actually, my "mistake"
appeared to be a brilliant move at first, as I made $30,000 in a few hours.
But in a few more hours, that number was negative. However, I was not
investing out of speculation, I invested because I thought that these
companies were going to survive the recession - in fact, because of a
statement from Hank Paulson (then Secretary of Treasury) who said that the
government would not be taking over these entities (they were GSEs, but
publicly traded). Hours later rumors turned against this, and within weeks it
was trading at $0.25 or less (down from $7 to $11 a share where I originally
was trading it at).

But it gets better - little did I know (at the time) that Paulson was a
Goldman Sachs alum:
[http://www.nytimes.com/2008/10/19/business/19gold.html?pagew...](http://www.nytimes.com/2008/10/19/business/19gold.html?pagewanted=all&_r=0)

And that he gave advance word of their failure. Some people might call that
insider trading, but, what do I know? :)

[http://www.bloomberg.com/news/2011-11-29/how-henry-
paulson-g...](http://www.bloomberg.com/news/2011-11-29/how-henry-paulson-gave-
hedge-funds-advance-word-of-2008-fannie-mae-rescue.html)

------
indrax
>The SEC estimates that it would cost $39,000 in fees to accountants, lawyers,
and the funding portal to raise just $100,000, and more than $150,000 to raise
$1 million. Those are insanely high capital costs—companies would be better
off financing their operations with credit cards.

15% on money that never has to be paid back? If we're comparing to
Kickstarter, fees are at least 8% and you are contractually obligated to
supply a product.

>For comparison, underwriting fees for a large public offering are usually
under 4 percent.

Why are we comparing this to a large public offering?

------
forrestthewoods
You'd have to be crazy to give away stock as part of a kickstarter campaign.
Even it were possible I can't imagine many project creators making that
choice. The numbers just don't make sense. Especially given how successful
kickstarter has been without it.

~~~
throwaway7548
Following your logic: "You'd have to be crazy to give away stock as part of an
investment round. Even it were possible I can't imagine many project creators
making that choice. The numbers just don't make sense. Especially given how
successful kickstarter has been without it."

~~~
forrestthewoods
Let's say your a 2-4 man startup of industry professionals with a game
prototype and a great trailer. You have the potential to bring in upwards of
$1,000,000 on Kickstarter. That money is pretty much equivalent to pre-orders
plus varying levels of "special edition" perks and physical goods.

How much equity would you put on the table and how much money would you want
for it? Keep in mind that if you have a good pitch you can bring in $1,000,000
for no equity and if your game is successful it could bring in another
$3,000,000 to $10,000,000.

~~~
kristiandupont
Those are some very generous numbers you have there! Of course, there are
examples of successful KS campaigns but it's not exactly a sure thing.

Also, it requires that you have a (typically consumer) product that you can
pre-sell. What if you are making a Saas that could turn into a profitable
business but that cannot be launched on Kickstarter? It might still be a good
investment opportunity so the other model could work.

~~~
forrestthewoods
YC funds $120k for 7%. But the majority of the value in being a YC startup
isn't the cash. Cash is a much bigger portion of the Kickstarter value
proposition but it also provides value as a marketing tool and in establishing
a hardcore fan base.

I wonder what fair numbers would be. Hrm. Hard to say. A lot of 1-4 man small
teams would do it on second thought. I think $100k for 10% is a pretty crap
deal but creators would probably take that offer. Hard to know how Joe Public
would respond. Definitely hard to predict after 5 years when people compile
lists of games that even gave a break even return. Game companies and software
startups don't exactly have a high success rate.

------
notastartup
Honestly, I don't think it's going to work because a small number of people
are always going to try to cheat the system and end up ruining the whole
thing.

~~~
Gustomaximus
That's pretty much every system in the world. You could say that about credit
cards, tax returns, democracy, road rules, marriage... etc. They need to set
up a framework that minimises opportunity for cheats and accept there is risk
in everything.

~~~
notastartup
security fraud is much lower and SEC is successful at enforcing cheaters. We
need this level of regulation for kickstarter with equity to be successful,
otherwise we are going to see innocent people getting duped easily and slip
away without facing any restitution.

I just don't see this happening without support from government regulatory
body and without it, the result would be disastrous.

