To Turn The Crowd Into Venture Capitalists, FundersClub Raises $6M Seed Round(techcrunch.com)
techcrunch.com
To Turn The Crowd Into Venture Capitalists, FundersClub Raises $6M Seed Round
http://techcrunch.com/2012/10/19/fundersclub-seed-round/
30 comments
Crowdfunding startups has always sounded to me like the best way to hide risk from retail investors seeking a quick buck since the invention of the mortgage backed security credit default swap.
Retail investors did not buy those. The closest they got was either a) houses backed by ARMs made economic by mortgage-backed securities or b) shares in the publicly traded megabanks which held billions of mortgage-backed securities.
Can someone explain to me why you need to make 200k/year or have 1 Million in assets to participate in this when the minimum funding level is only 1k? I want to participate in this, but can't.
The theory behind the law which requires this is that investing is very exceptionally risky and that non-sophisticated investors are likely to get taken advantage of. Therefore, dealing with them comes with a book of regulations which rivals that of major world religions. There is an escape clause for "accredited investors" : basically, if you are a professional money management institution or hit certain income/assets levels the government allows people to assume you know what you're doing.
If you'd like to buy equity in a startup, I'd candidly advise against it, but the way forward is through a non-public transaction like the kind that happens in friends and family rounds. After professional money is involved most startups would be instructed to not take your money - the risks involved swamp the value of your marginal $1k.
If you'd like to buy equity in a startup, I'd candidly advise against it, but the way forward is through a non-public transaction like the kind that happens in friends and family rounds. After professional money is involved most startups would be instructed to not take your money - the risks involved swamp the value of your marginal $1k.
They've limited participation to so-called accredited investors (with minimum income or assets as defined by the SEC). There are non-trivial regulatory requirements that come with accepting money from unaccredited investors, so many (most?) startups do the same.
Basically, "Because it's an SEC regulation"
OK, then I understand why this company and other start ups follow this rule.
But not why the rule is in place in the first place. To me, it sounds extremely discriminatory that any government regulation would have a fixed income or asset level requirement.
OK, then I understand why this company and other start ups follow this rule.
But not why the rule is in place in the first place. To me, it sounds extremely discriminatory that any government regulation would have a fixed income or asset level requirement.
This regulation exists for consumer protection. Prior to this regulation, people were conned out of their money by investing in companies that may have been a sham. This does imply that rich people are less prone to hucksters than the poor (or that it is more acceptable for them to lose their investments..) Recent legislation changes this so that anyone can invest up to a percentage of their annual income, while rich people are unbounded in the amount they can invest. Editorializing, I think this is a good compromise.
A liberal paraphrase might boil down to the old adage:
Don't make a bet you can't afford to lose
Back in the day, people presumably "bet the farm" on XYZ shady investment. Since the farm was all they had, it was a bet they could not afford to lose. But obviously 9/10 startups fail to be great investments. So, as public policy, the Gov't didn't want 9/10 farmers to go bankrupt. a Rich guy will a $$$ minimum assets can still lose a "farm" and have something left (ie, diversification).
Becuase the rich guy can (in theory) have scope for more investments (experience) and/or to pay advisors (expertise), they are seperated out. Note that there are lot of unsophisticated rich people and/or investors in certain areas that have varying levels of sophistication (empirically). But with the privelege of wealth come the obligation to realize caveat emptor, vis-a-vis public policy.
Don't make a bet you can't afford to lose
Back in the day, people presumably "bet the farm" on XYZ shady investment. Since the farm was all they had, it was a bet they could not afford to lose. But obviously 9/10 startups fail to be great investments. So, as public policy, the Gov't didn't want 9/10 farmers to go bankrupt. a Rich guy will a $$$ minimum assets can still lose a "farm" and have something left (ie, diversification).
Becuase the rich guy can (in theory) have scope for more investments (experience) and/or to pay advisors (expertise), they are seperated out. Note that there are lot of unsophisticated rich people and/or investors in certain areas that have varying levels of sophistication (empirically). But with the privelege of wealth come the obligation to realize caveat emptor, vis-a-vis public policy.
This is why crowdfunding is such a misleading term. If it is was real crowdfunding, it means regular Joes like you and me can invest in the next Google BEFORE it goes public. Otherwise, there's nothing to get excited about here.
The JOBs act is an attempt to change that - when that goes through crowdfunding will be extended to non-accredited investors. Until then (i.e. until sometime in 2013), accredited only.
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I'm incredibly skeptical of the weak term sheets that would come out of this process. It looks like the crowd gets dilutable stock with no option for next round priority investing. Best of luck on their success - I hope my initial take is wrong, because this would be exciting at scale.
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congrats to a great team and amazing execution! FundersClub isn't the first in the space, but it's definitely the first to gain so much traction in such little time. I hope they keep killing it!
FundersClub firmly believes it’s legal because it never handles the money directly, instead raising money for a venture fund that funnels into a startup.
-- Intersting. This sounds more like lead-gen.
-- Intersting. This sounds more like lead-gen.
Massive, scary legal risk here. This won't last long.
I'm sure you have your reasons for thinking this, but having read Hacker News for 4-5 years now, whenever people start making claims of startup failure based on legal risks, for me that's now a pretty sure sign of a winner-in-the-making.
PayPal (banking laws), YouTube (copyright laws), Airbnb (hotel laws), Uber (taxi laws), Facebook (FTC privacy laws).
Right. Startups that are "innovating" on what's legally acceptable seem to do pretty well once they reach momentum. We can certainly debate the "rightness" of it, but the fact that there's a debate there is a real obstacle to keeping out other players.
Those are nothing compared to SEC laws and IRS requirements. Run afoul of them, and prison is in the cards.
And PayPal didn't break any banking laws, only ran into parochial issues in some states.
And Uber is having trouble too, aren't they?
And PayPal didn't break any banking laws, only ran into parochial issues in some states.
And Uber is having trouble too, aren't they?
The biggest risk here is that the transaction will be voided out (at the option of the buyer) -- if your company fails, you may have to pay the money back to the investor. If the company is successful, the investor won't exercise that option.
Honestly, for $100-200k, I'd do it -- paying $200k back to investors in the (1%?) chance that this funding mechanism is invalidated AND your company fails is a risk I'd be willing to take.
I am not a lawyer and this is not legal advice, of course.
Honestly, for $100-200k, I'd do it -- paying $200k back to investors in the (1%?) chance that this funding mechanism is invalidated AND your company fails is a risk I'd be willing to take.
I am not a lawyer and this is not legal advice, of course.
AirBnB does pretty well on an IRS-flouting (and similar state-level authorities) business model.
AirBnB doesn't have any IRS issues (at least not that I've heard of). Their problems stem from being an enabler within an industry that typically requires licensing... and doing so to rent properties for fewer than 30 days without permit (required in some areas). Yeah, the law seems preventative, but it's in place as a zoning issue to prevent a bed and breakfast from popping up in your mom's cul-de-sac.
AirBnB is a good idea, running up against zoning laws that are also (generally) good ideas.
AirBnB is a good idea, running up against zoning laws that are also (generally) good ideas.
I've been reading hacker news for a long time, and actually making companies also... more than just reading.
The "legal risks" here are with the SEC and IRS -- the top two most risky legal risks in the universe. Both send people to prison.
The "legal risks" here are with the SEC and IRS -- the top two most risky legal risks in the universe. Both send people to prison.
Way exaggerated. At most they get some road bumps. Nobody's going to prison.
> Nobody's going to prison.
That depends on what happens. No one thought Martha Stewart would end up in prison for insider trading, something that didn't put other people's money at risk.
That depends on what happens. No one thought Martha Stewart would end up in prison for insider trading, something that didn't put other people's money at risk.
So much for dogfooding...
Look at CircleUp for what I believe is a better model -- crowd funded capital for semi-established consumer brands.