Crowdfunding exemption - WeFunder and other Senate nudging

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12 Responses to “Crowdfunding exemption - WeFunder and other Senate nudging”

  1. haileris says:

    The requirement for an intermediary for the Senate proposals reads like corruption. 

    I don’t think the croudfunding website is acting in good faith.

    H.R. 2930 has already passed the house. Why not support that resolution? It allows for transactions without intermediaries.

    The Wefunder support of the Senate resolutions (which have neither passed the Senate nor House) sound like they want to shut down the progress of H.R. 2930 to ensure that they can be middlemen collecting fees. The senate proposals REQUIRE intermediaries, while H.R. 2930 makes it optional (but encouraged).

    Support H.R. 2930, it will ensure that startups get the money they need without the hassles of intermediaries and their fees. Do not support Wefunder, it reads like fake grassroots to ensure middlemen get their cut.

  2. Paul Spinrad says:

    I think H.R.2930 is right to not require an intermediary– that’s important, a small local non-tech savvy business shouldn’t have to go online.  But I like the lower individual investment cap of $1000 better in S.1791 — I think $10K / 10% of income (H.R.2930) is way too high to start this new legislation out with.  S.1970 is brain-dead — like, it doesn’t require an open forum for discussion of the investment — duh.

    As for Wefunder– I don’t know where it came from, how it came to be, or who’s paying for it (if it isn’t grassroots), but I think it’s fine.

  3. allen says:

    I want to agree with the idea that this would enable small innovative business, and I think that I do.  However, I also do see the fear that there would be a lot of fraud springing up around this, since only something like 1 in 5 startups succeed.  This is especially problematic since a lot of the really good small businesses that would need this funding would come from people at the beginning of their careers, who will  have little credibility or reputation to vouch for their reliability.

    So… I’m in favor of it, but I don’t think that it is an idea without challenges, and I think it’s going to be tricky to harness the power of the idea in a way that is resistant to scumbags.  Likely it will resemble gambling a lot more than normal investing does, which will mean that entrepreneurs will have to give up more of their company for the money to offset the risk, which means that it will be a less attractive form of funding.

    On the other hand, you might get a lot more investors who want to act as angel investors with small amounts of money for good ideas without expecting a big (if any) ROI.  But kickstarter already allows that…

    • It’s worth the experiment. If the new exemption is burdened with the complexity of regulatory checks that exist today for other forms of public offerings, it will never get off the ground. But if it isn’t crowdmonitored adequately and becomes the purview of scamsters, it will die, too.

    • zebbart says:

      To me the most important thing is that it would allow investment from people with personal relationships. I run a farm cooperative with a CSA, and the same people who give me $500 up front for a seasons’ worth of produce (quantity not guaranteed) might be interested in lending my LLC $500 to put into a new walk-in cooler or refrigerated truck with my integrity as the only collateral.

  4. JonathanPutnam says:

    Yes! Yes! A thousand times yes! I have thought this would be a great idea for years. I think the lower investing minimum is a better place to start (to be honest, I think it could even get into lower, micro-finance territory). Kickstarter is great, but as another commenter mentioned, it’s not exactly an investment that you get a return on. Some indie films have already gained impressive funding from Kickstarter, but efforts like this could completely revolutionize the industry (really the entire economy). Production companies could sidestep the major studios and raise funds to film from the general public. Restaurants and pubs could also be greatly benefitted by allowing locals to fund concepts/chefs/etc. that are locally needed. Of course there is some chance for fraud, but with ratings, filters and other tools the Internet has at its disposal (karma points?;) this will truly democratize capital flows. Thanks for bringing this up!

    • Andrew Singleton says:

      Given right now local employment options are dead, and what I /WANT/ to do can’t be done without finding investment (bookstore with provisions to encourage local authors to chip in, be it epub/pdf/etc, physical copies, or whatever.) Right now I can’t do it, and i have hesitated to pull a kickstarter because i can think of no good incintives for random internet people willing to donate.
      Something like this, provided there’s a way to let people give ratings (not just one big regulatory only giving ratings. I like the karma suggestion) so people can tell if that person is worth continued investment in.Of course it’d be nice to be able to do stuff to accumulate karma beforehand so folk would know from the onset if the new guy is a good risk or not but once that starts happening when do we tell people ‘no you can’t register’?We’re getting into whuffie territory folks. That or I’m up at an insane hour of the night and not thinking straight.

  5. arbitraryaardvark says:

    if you want to do a project like that without waiting for these bills to pass, one thing to look into is a to have a church sponsor the project. churches can issue bonds (typically for things like building church buildings or schools, but could be for other things), often with a  lot less red tape than public corporations. this works best when you are raising funds in one state rather than globally online. consult an investment lawyer before implementing this.

  6. ContentShark says:

    You know, I think people should be free to spend their money as they like. If they want to invest in hairbrained schemes they find on the internet, well, more power to them. 

    But the wacko dreamers who believe that anything is great if it’s on the Internet should pause. There’s a reason why these laws exist. People have been scammed in the past and they continue to get scammed today. If we lower the barrier to entry and make it possible for anyone to float stock by putting up a web page, we’re going to have a massive increase in fraud. I’m not saying that most people are dishonest, it’s just the dishonest will flock to the crowd funding schemes.

    And it’s not just the dishonest that are a problem. Plenty of people– myself included– have grand dreams and like to imagine that it’s just like that Kevin Costner movie: “If you build it, people will come.” But if you just look at the failed web sites you’ll see that this is far from true.
    Take a look at the default rates of the micro-finance loans. They’re sobering. Everyone wants to believe that the bankers are evil and the world will be better if we cut them out of the loop, but the fact is that they make some difficult decisions about reality. http://www.mymoneyblog.com/prosper-p2p-lending-update-2-scary-graph-and-stats.html 

  7. VirgilSoames says:

    Love the idea of crowdsourcing financing as well, but share a lot of skepticism about the way the bills are currently drafted.   

    Apologies if I seem like a kill-joy, but to sum up:

    1) It seems like the bills should require robust disclosure of some sort if it allows general solicitation (e.g., audited financial statements or financial projections and planned budgets certified by someone).  

    2) The ease to pursue remedies for losses should be strengthened – the incentive to pursue remedies, even as a class action, will already be smaller.

    Please note that this is not legal advice, and I’m writing in the role of an interested party rather than as an attorney. 

    The central premise of securities law is based upon ensuring 1) accurate disclosure and 2) that the investors can understand that disclosure. 

    Looking at the HR bill, a crowdsourcing exemption replaces both of those protections with new protections: 1) limiting loss to any single investor, 2) providing an open forum for discussion and 3) requiring a questionnaire. The other protections are not especially significant.

    With regards to limiting individual loss, I’m not sure that alone can justify the exemption. The aggregate harm is the same. If there’s no additional deterrence of fraud, why should we be more comfortable with someone stealing $1M in smaller amounts over someone stealing $1M  in bigger amounts, especially if the smaller amounts may represent a larger percentage of individual income (up to 10%)?

    Providing an open forum on a website seems like a false shield. Investors today already discuss securities in many existing forums. Often these forums lead to speculation. The issue is not the lack of discussion; it’s the lack of new information  (i.e., disclosure from the company) and the sophistication to understand it (i.e., financial analysis).

    The questionnaire also seems rather dubious. If someone wants to make an investment, how will filling out a questionnaire deter or protect them? If anything, it’s a way for the issuer to avoid liability (e.g., compare with Reg D private placement letters from institutional investors).

    Two additional thoughts also come to mind: 

    First, look at the closest existing exemption under securities law. At first glance, Rule 504 under Reg. D allows for $1M with no information disclosure, but requires private placements. It’s the most liberal of all of the securities exemptions.

    Read carefully though, the requirements can be reversed. If you register under any state with a public filing / disclosure requirement, you avoid the general solicitation prohibition. In other words, you replace the private placement requirement with an information requirement.

    As currently drafted, the crowd sourcing exemption essentially nullifies the logic and need for Rule 504. It allows for general solicitation + no disclosure.

    Second, one of the reasons why federal registration is so desirable is because of the remedies for non-registration or false registration. If you don’t register a security, it’s strict liability with a put (i.e., you get the right to sell the security back to the issuer for the price you bought it). The remedies for false statements in registration materials are also favorable to the plaintiff than actions for general securities fraud under Rule 10b-5.

    By not requiring registration of some sort, you lose out on these enhanced protections for investors. All in all, I would be hesitant to propose the law as it’s currently drafted and would definitely recommend hiring an experienced securities regulation attorney to propose some recommendations to improve the bill.

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