Real people with small amounts of money can easily fund all of the great ideas in the world. Even big ones I think, like cancer research. If properly controlled (diversified, limited) it really could be the best way for people to invest maybe 10% of their savings.
We just need a lot more work done in this area until it's safe and simple for people and companies. This will be one of the many things that cause technology to accelerate even more in the future.
There are a number who are afraid of equity crowdfunding for the reason that some consumers will get fleeced. While that is an admirable sentiment, if it was frankly more genuine there would be more effort put into curbing the thousands of "financial vehicles", payday loan companies and MLM's that scourge the poor. This isn't that. Yes, we need limits and constraints, but there's too much at stake to throw the baby out with the bath water.
I think that it needs to be paired with an elaborate vetting process that still is missing in crowd funding projects. Why can't we have organizations that provide Technical Due Diligence, etc.?
In other words, I completely agree with you. Currently VCs (and many Angels) are like major label record companies: they are more risk-averse than they realize, they operate in a strict handful of myopic categories, and they are unashamed of the old boys network aspect of it. It's all ripe for disruption, and while the effect of that might mean some consumers will be cheated, we can mitigate that portion. And the upside is huge. You are right, it would absolutely "cause technology to accelerate even more in the future." The future could be much brighter if we can figure this out.
Your idea for technical vetting organizations is an interesting one that might solve some of this, but unless it's mandatory for getting investment, I imagine that most companies won't bother.
This is sort of the function that syndicate leads can provide, though.
And my point is that I'm really driven by the upside here. We're on the cusp of huge technological change and what's holding us back is the pedestrian way we're approaching it. We're facing 21st century potential with 1960's Mad-Men-styled cigars and handshakes.
This tide will lift all boats. (Yes, silly and fraudulent projects will get funded, maybe even more so, but so also will the truly innovative projects we didn't even know we've been waiting for.) This is the moment in history when we need to liberate innovation from the current gatekeepers of sweaty bald men in suits who are really just looking for Facebook and Snapchat clones, to the public to better unleash the potential of what's possible.
Maybe there's a way to structure this to get the benefits while still protecting the little guys. Maybe the new law's restrictions are enough, since they'll ostensibly be enforced by the gatekeepers who facilitate the investment. I certainly hope so.
That's still a big problem. Read "The Wolves of Tel Aviv", about the "binary option" scam industry.[http://www.timesofisrael.com/the-wolves-of-tel-aviv-israels-...] About 0.7% of Israel's GDP now comes from this scam, and that's just the part that pays taxes.[http://www.globes.co.il/en/article-binary-options-worth-125b...]
There are risks indeed to crowdfunding, but not wholly unique ones. All one has to do is browse penny stock boards, or perhaps Bitcoin boards, these days, to find scams currently in progress and bagholders left with nothing but broken hope. Equivalently, a lot of VC-funded companies are in it to build up an impressive but fragile organization quickly and then hand it over to someone else before it explodes.
The change here is merely that we are removing gatekeepers to participating in the action at all, and the illusory veneer of stability that affords. Every company is built on some degree of faith, and that makes early investment a largely irrational proposition. The question to focus on is not "how much abuse will ensue" but "how do we mitigate damage", a question not really asked at the high levels because it is dangerously close to revealing how power works.
If anything, Kickstarter et al have proven there's a massive market demand for it. It's just been the good old boys at the SEC who have been slow to catch up, even when given the mandate to.
The purpose of VC and angel investing is to be risk tolerant, and this is extremely risk intolerant.
I'd personally rather have few major shareholders on board who understand business and get it, than X amount random people all having their own ideas.
It does give more power to entrepreneur, as with more options you negotiate better investment deals.
No doubt, this still happens. But grandma was quarantined.
At least with owning equity there are some legal maneuvers for shareholders to go after mismanaging executives.
Every investor you take on is there for life and has a unique set of goals. The advice they give you is bent towards those goals, be it creating the best product, exiting in six months, IPOing in 10 years, or making a large social impact. I can only imagine the all-caps emails from first-time investors demanding the company go in one direction.
Investor relations can be a time sink to manage for an early stage company, especially if you have inexperienced investors who only read about the good times on TechCrunch.
You just made the assumption that they will have a say at all! Non-voting shares are in vogue!
Everything from the idea of "annoying peons", to the idea of VCs balking at a warped cap table even though the crowd can be grouped together as one
Is not having a direct line 24/7 less respect than a investor deserves? Especially one who was invested only a few hundred dollars?
Most companies who raise through Invesdor use an "Equity Crowdfunding Shareholders' Agreement" that each investor must sign. Its wide boilerplate language prevents the small investors from selling or transferring their shares, and requires that they vote on key issues according to instructions from the Board.
That kind of agreement basically strips the investors from any actual power in the company, so their influence really is limited to "all-caps emails". Even then, my impression is that most of these small investors are reasonably well diversified (contrary to what one might expect) -- they put small amounts of money in multiple Invesdor companies, and don't expect a return any time soon.
Often they're really just looking to support the business Kickstarter-style, with no actual expectation of an exit.
You can never sell or transfer your shares? Then why would you ever invest?
This type of clause often exists in shareholders' agreements between founders as well, to prevent one founder from selling a substantial part of the company to a party the others might not approve of.
It's almost impossible to profit as a shareholder via crowd funding even if the company is wildly successful as it stands currently. Hopefully in the future the markets or legislation will adjust this once that becomes more clear to the general public.
Curious how much of their userbase qualifies to be an Accredited investor.
Last time I check the SEC interpretation of the rules in 2015, they put the onus on the crowdfunding platform to make that identification.
However, it will be interesting to wait and see if someone (probably and accountant or lawyer) figures out a structure/vehicle that allows me utilize the positives of crowd equity while staying away from the negatives. EDIT: Maybe a crowd equity funded VC group...? Run by sophisticated investors.
See eg http://lcif.co and https://www.crowdcube.com/pg/not-just-the-crowd-1712
Re: edit, absolutely. Crowd investment into a portfolio / fund vehicle is a great idea. Likely to be more like a quant fund / index tracker though, rather than professionally managed -- because who wants to pay 3% annual fees. And what would you logically track? AIM or crowd equity platforms because they are your signal.
Back in late 90's when everyone was starting a company with no product at all. Back in the mid 2000's when people were buying houses with no income verification.
If there is anything that is going to lead to the next bubble, this might be it.
Step 2.) Raise another IndieGoGo campaign that just promises a lesser return.
Step 3.) Raise one more IndieGoGo campaign that just promises an ever lesser returns than that.
Step 4.) Make perks payout schedules and trickle enough money out to the original raise to the few top perks of the other raises.
Now have now hypothecated a $10,000 raise to a $10,000,000 position. Wrap up the entire position in a derivate. Wrap that up in another derivative. Wrap that in a derivative. Then allocate the rest of your raise to meta counter positions that arise from those positions.
Slowly release cheap updates for the original raise and slowly lose community confidence. Trigger the derivative condition cascade. Make stupid money.
You may have better luck with the Wall Street crowd.
It is already legal, the SEC passed Regulation A+ in 2015. Companies must be approved by the SEC for Regulation A+ and then they can sell their offering to unaccredited investors. There is limitations in number of investors and the dollar amount of investments.
I work for Issuer Direct and we help companies apply for Reg A+ and get funded.
There may be some other section that addresses the international portion of the offering. All of the companies going through Reg A+ have lawyers familiar with it writing these filings and telling the company what they should and shouldn't do. If you find one you want to invest in, your best bet is contacting the Company's Investor Relations department and they'll let you know.
While I love the idea of crowdsourced equity investing, I think a lot of uneducated (and educated) people will lose money chasing after the hype. Hopefully it will be a learning process and some form of it will continue afterwards that is beneficial for everyone.
- Have your bog standard crowdfunding site: bunch of projects with pics, descriptions, videos. Pretty much anything goes.
- With enough interest, appoint a due diligence person. So say some guy gathers enough money for his moonshot. Site appoints someone with real credentials (worked in space industry, auditing, etc)
- Due dilly guy gets paid for report.
- Investors decide if they want to play.
- Weakness: who does due dilly on the due dillies? I guess you need a sizeable network.
More info on their site here: https://www.fig.co/
upside is capped at some fixed proportion of the income from the game
This will be really cool to see. Now don't get me wrong, I'm nearly 100% sure anything like this is going to end horribly but it's good to be optimistic, right?
If the President gets his SEC Commissioner confirmations, everything should be able to get past the SEC if it simply promotes transactions between people.