Let The Games Begin
That was my partner John's email response when the news came across our internal email list that the SEC had finally lifted the General Solicitation Ban as they were asked to do by Congress in Title II of the JOBS act.
What this means is that folks raising capital can now advertise the fact that they are doing so. I have been involved in raising close to ten venture capital funds and every time we do that, we have to be quiet about what we are doing until we've done it. That won't be the case anymore.
But the impact of this on the VC business will be tiny compared to what this means for entrepreneurs. Our investment in CircleUp was in some ways a bet on this kind of change to the funding market. Entrepreneurs that have consumer products, like Rick Field who has built Ricks Picks into a high end pickle brand, can now raise money on the Internet (he is doing just that now on CircleUp) and tell all of his loyal customers about it. Some of them will likely want to invest in a company that makes products they love.
What I just did there, promoting Ricks' raise, would have been a violation of SEC rules until yesterday. It feels good to be able to do that.
My grandmother Dotty Wilson would always buy stock in the companies whose products she used. She believed that if they made great products, they also made great investments. It worked out well for her. I do that myself. Twitter and Disqus would be two examples of that approach to investing.
So get ready for investment pitches on pickle jars, face creams, and bags of coffee beans. Entrepreneurs will be using their products as payloads for their pitches.
But as John's comment that is the title to this post suggests, this will be the wild west. Scams will be easier to execute. Buyer beware. Do your dilgence. Diversify your risk. Prepare to lose money. That's the rules of startup investing but not everyone knows that.
I would bet the SEC is not too excited about what they have just unleashed. But I am. This is a step, just a step mind you, toward the democratization of startup investing. The SEC has not fully implemented the JOBS act and even after they do, there will be more to do to make it possible for everyone to enjoy the risks and rewards of backing entrepreneurs and their dreams.
This is what I do and what I love to do. I dont' believe it should be relegated to rich people and professionals. And slowly but surely it will not be.
why was is deemed necessary to be quiet about raising money?
To save the best deals for those who write the rules (ie the already wealthy).
I am usually not a cynic, but in this case….
to avoid scams
How has that worked out? 🙁
It’s a lot more fashionable to scam rich people then poor people. When rich people get scammed it usually doesn’t go on the 10 o’clock news with some sob story. Now that poor people can get scammed… It will be interesting.
Not sure. Weren’t most of the Madoff victims well off?
I don’t remember any of them standing on their front lawns talking to the camera about how nice the guy was until he wasn’t.
Let me Google that for you:http://bit.ly/1dmxz2Z
Good one, Jim. Avi, Jim, you are right. There was a lot of this with Madoff. (I guess I could fall back on the fact that I said “usually” but that’s probably cheating. 🙂
We don’t know what we don’t know.
LOVE me some Rick’s Picks!!! Smokra, Wasabe Beans, Oh my!
those are my two favorites too. i also phat beats.
amen brother tony. and thank you.
Opportunity for private (non-sanctioned, non-officially-approved, therefore likely to be real and honest) rating companies?
i think so
Need to come up with a replicable way to evaluate. No 10Ks or even real revenue to use classic evaluation.
.One is still going to have to adhere to an offering memorandum/prospectus disclosures to skirt garden variety fraud implications.JLM.
“garden variety fraud”…
I need money.
That’s the full extent of your solicitation? 😉
I need your money.
1 more word than previously. You’re making great progress.
My product will save the world !!!!!!!!!!!!!!!
“I need your money now.”
Dotty Wilson! She followed the Peter Lynch method before Peter Lynch – we’ve got to hear more about her!
an army wife who also happened to be a very savvy investor
.Anyone named “Dotty” is going to be good at whatever she does.Think about it.JLM.
Dotty. One of those great early 21st century names, along with Dorothy and Esther and, Pearl and Rose. Love those old school names. (My wife’s name is Esther, although I didn’t marry her because of her name.)
.That’s odd because Esther says she married you because of YOUR name.Sorry.JLM.
I’m Jewish but my wife isn’t. She has the best Jewish name though, as her middle name is Rebecca. Esther Rebecca Freedman. Oy! 🙂
When I typed that I was actually thinking, “Shana’s going to laugh at this.” 🙂
tis true. I know I am very very jewish. Hell, for a bit I even made my own honey whole wheat challah!It is almost as funny as the fact that my middle name is Lee.
Mmm… challah. My wife was making them for a while. Man, are they good…
Peggy and Wilma have got to be on that list too. (Although I think you mean 20th!)
My mom is Peg or Peggy
.Fred, you really should know your own Mother’s name.Wait for the drum roll.Which one is it?Sorry.JLM.
Dotty’s real name was Dorothy
I’ve got a Fannie and Gladys (Goldey). Both my grandfather’s were named Harry. Also noticed that my parents generation end in “y” sounds or changed to end in y sounds. Randy, Stevie, Jaynie, Stuey, Mickey, Sheri…
How funny! Mine too. And we have the same last name — same (less common) spelling.
Josephine? One of my grand-mothers names.
Mine was Matilda – also a name that fell out of fashion, along with her husband’s, Dudley
“an army wife who also happened to be a very savvy investor”More important than “savvy” is doing.What your grandmother did was she did something and took advantage of an opportunity which given the time period she was investing in, had a good chance of succeeding “rising tide”. My father did the same with buying real estate in the 70’s. Some people said “ok so you had luck look when you bought” which of course was true but otoh he also studied at night real estate classes, did the legwork, wooed the crazy widows  etc. And actually bought things for pocket change. (Same with me and domains. I actually did it and needed to know enough to do it when presented with the opportunity.)When I went to Penn people said “oh because you went to private school” (which was my idea not my parents – although they obviously paid) but my sisters didn’t want to go to private school they preferred to stay at public school because they had friends and like the social scene there. Same family. Same opportunity. Example of opportunity when things aren’t easy, everyone else is scared off, and you can turn dealing with crazy people into an advantage.
you have a long army history it seems
was that her full name?
I am super excited about this change. I think it is obvious that this will be a big deal when it comes to getting the message out that companies are working to raise capital. Now it will give entrepreneurs the power to get their message out to a much wider audience. Until this change, people would have to be connected somehow, or indirectly through another investor/friend to the people they were raising money from typically. While I’m sure this will continue to some extent, I expect that the good deals will get plenty of interest from outside of these circles as well. This can only mean more potential for funding for startups which I think is ipso facto good.
Are there platforms for raising the money? Is kickstarter/one of the other crowdsourcing platforms going there, or new platforms showing up?
“Prepare to lose money”. You once said (paraphrasing) that “VC’s are used to losing money. That’s what we do.”I think it’s exciting that small brands can call on the support of their customers to continue to grow.
Well, so long as those customers meet the SEC’s standards for an “accredited” investor. Perhaps that’s the next step for change.
I’m all in.It’s going to be really messy and interesting.
“Messy and interesting.” Yep. Change always is. 🙂
Free markets are like that. Messy and interesting. But they allocate capital the best.
I agree 100%
The question is how do you scale your consulting business for new work that might come in the pipeline.
Scaling consulting is usually a contradiction of terms.Not trivial.
“Not trivial.”Way to do this might be to align with an existing firm (say an accounting firm) that already does existing consulting in other areas or similar that isn’t offering services such as yours. That way you get to share overhead and take advantage of their infrastructure. They pick up the clients perhaps as well (and you get a cut of that). And the people who are hired to do the legwork (say recent college grads) have a place to hang out. You are the brain at the top who only comes and does the surgery. You don’t do the nurses work.Of course this definitely takes away from the freedom that you have on your own now which has so many benefits.One of the things that I never liked about consulting was that you have in a sense nothing to sell. For example when I worked and did my first company after 9 years I had something to sell since my role in it wasn’t key. With consulting it’s you you really aren’t (as 1 man) building any equity. And you are constantly looking for new business (no residuals) and things don’t fire w/o you working hard every single day.None of this is probably important as far as why and where you are out now. I am just mentioning for others to consider if they are at a different point in their careers.
Businesses where you don’t build value unless you are working are just a problem.Consulting has it’s foot in that camp.
Ha! I thought you were talking about The Ashes when I saw the title.
Here is the baseline for how the reg D exemption is used now. Remember, the x axis, with or without, general solicitation is limited to accredited investors.
I’m not sure public solicitation on a blog is now legal. Public solicitation if Accredited Investors is now legal. Public solicitation from non-accredited investors continues to be illegal. Private offers need to make a “good faith” effort to only solicit from Accredited Invedtors per the recent SEC rule making. I don’t think publicly blogging about raising capital for a private investment qualifies as a “Good Faith” effort. I could be misinterpreting the rule making, but that’s my read.Still good news for CircleUp, Angellist, FundersClub and others, because their Good Faith effort will be easy: just ask members if they’re Accredited during the registration process.
.The new rules will provide exemplars as to how to do exactly what you have described. They won’t be out for about 60 days so anyone jumping the gun now better beware.JLM.
.One can solicit anyone but “sales” are limited to accredited investors only.The issue of accreditation has to be finalized at the time of the sale only.Acc Investors are:$1MM net worth not including primary residence;$200K individual income; or,$300K joint income.This ain’t the high hurdles or the long jump.JLM.
“This ain’t the high hurdles or the long jump”– speak for yourself !;)
yep, that’s clearly him! Hey @JLM:disqus: since it’s now legal for me to solicit you here, and you’re clearly accredited (so I can also close you), please paypal me $1MM. It’s just a short jump for you! bwahaha.
.Kenny, brother, you didn’t get the last PayPal transfer?JLM.
darn, aren’t you using venmo.com yet?
Sign up for circleup JLM. It takes only a minute. You will be asked to answer those very questions and rep to them
Actually, according to the SEC, determining whether an investor is “accredited” is now a much more complex issue than previously. The SEC has published a lengthy (116 pages) ruling on all aspects of equity crowdfunding. The information on accreditation now include a sliding scale of numerous factors, such as the minimum investment size of the offering, how much the prospective investor is investing, etc.Here is the SEC doc: http://www.sec.gov/rules/fi…The rules have just changed…
.I am not sure where you are looking but this is the actual footnote from the actual Rule. It does, in fact, conform to the recent Dodd-Frank change.Remember this is the Reg D exemptions only and not the “on ramp” deal.”The definition of the term “accredited investor” that is applicable to Rule 506 is set forth in Rule 501(a) of Regulation D [17 CFR 230.501(a)] and includes any person who comes within one of the definition’s enumerated categories of persons, or whom the issuer “reasonably believes” comes within any of the enumerated categories, at the time of the sale of the securities to that person. For natural persons, Rule 502(a) defines an accredited investor as a person: (1) whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million, excluding the value of the person’s primary residence (the “net worth test”); or (2) who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year (the “income test”).”The link that shows this clearly is found at:http://www.sec.gov/rules/fi…Please let me know if you think I have this wrong.JLM.
You’re just looking at one small piece of “accreditation”.Read pages 19 through 44 of the SEC document.
.I think you are conflating the issue of how to document someone is an accredited investor and my point that the definition of an accredited investor is unchanged.The new Rule is very clear on that fact, see page 43:”We note that the definition of accredited investor remains unchanged with the enactment of the JOBS Act…”The issue of documenting that an investor is “accredited” has always been out there for any of the Reg D exemption rules. This discussion only focuses the microscope a bit tighter by suggesting a number of methodologies to go about documenting that fact.From my perspective the discussion is interesting but really not very illuminating. The issuer has to be able to document that the investor is an accredited investor by virtue of information solicited by the issuer and provided by the investor.That has always been how it worked. Always.In the end, the investor is either an accredited investor or not. Truth will always be the ultimate test.It is useful to note that in the discussion referenced, a letter from an attorney or a CPA can vouch for the status of an investor within a 90 day period of their determination.That is not a difficult thing to obtain — as long as it is true.Like so many things in the securities world, the pragmatic and practical is not as difficult as it seems if you simply know the principles, the rules and apply them diligently.JLM.
Yeah, that’s why clicking on the link to the ricks picks circleup page will only work for those that have been verified as accredited by circleup
Obviously circleup should redirect links like that to a page that explains why you are getting the login page (the fact that you have to sign up and why to view the info).Otherwise it’s lost opportunity.
Yep. I know this is a dicey area, but the UX needs some more thought. Sharing a link to a company’s page on CircleUp is and will continue to be useless until the user is presented with something other than a login form.
Would it be illegal for CircleUp to allow anyone to see Rick’s Pickles’ page on their platform, and then only allow accredited investors to follow through and make an investment?Thinking like a UX person, conversion rates for both CircleUp and the companies listed on it would go up immensely if that could happen.It also just seems silly for it to not happen. So what if i share a link and a non-accredited investor sees all the info? If they’re not allowed to invest, then so what?
Would it be illegal for CircleUp to allow anyone to see Rick’s Pickles’ page on their platform, and then only allow accredited investors to follow through and make an investment?Write a proxy service that has a login on circle up that allows anyone to view a circleup page as the accredited investor.
and then go to jail, lol.
Not so clear cut as you think.Haven’t checked the TOS of circle up but it would have to say something specific like you weren’t going to share info from their site with anyone else. Does that mean your girlfriend can’t be looking over your shoulder also?Even if that’s the case (tos) that’s a civil action not a criminal action.Taking it one step further if I am an accredited investor and I allow you to view information that I am privy to what law has been broken if I am not soliciting money from you or have made it clear that what I am presenting is only for “entertainment” purposes? Or what crime has been committed if I write a blog post and I repeat info from circleup paraphrasing a deal offering once again for information and/or entertainment purposes? And the government agency is going to take the time to go after this even if all the right conditions exist? They don’t even catch all tax cheaters they sample or use an algorithm.Ok then let me give you a real world example.As a registrar we have a contract that allows us connections to the “shared” registry system. That contract (could be a hundred pages or 40 I don’t remember) specifically states something like we will not share our password with anyone else (this is the short version for the purposes of the point I am making I am not quoting exactly). Anyway many years ago, let’s call it 9 for now, companies sprung up to take advantage of expired domain names using existing registrars connections. Connections that by contract more or less prevented that type of thing from happening. So what they did is not ask for the password but have us put the password where their software could read it (short version here not exact details) but a human couldn’t. (Or something like that exact details not important).Not only did that stand the test of time but in the early days you would be amazed at how much money we made from that. Really. (Side note guy who got that working was Mike Arrington of Pool.com prior to Techcrunch. Mike solicited us directly for that.)Consequently don’t write off the ingenuity of what can be done to game a system so quickly.You could be right of course. Or maybe not.
yes – also I would love to use circleup to discover products that are relatively underground that I might be interested in
That is what the new rule will allow – anyone could see Rick’s Pickles page, but only verified accredited investors can invest.
That’s ridiculous. So if I find this blog post, and I also like the pickles, and I drop a note on Facebook to tell people to go invest, I’d be breaking the law? How in the hell does the government expect normal people to know that?I’m baffled by how stupid this is.
i believe it’s more about the company…..i.e. if you had brandon’s pickles, and you posted on FB saying “hey anyone and everyone, including unaccredited investors! invest in my pickle company and become a billionaire!” that could be illegal. what constitutes solicitiation can also be somewhat subjective. i think some stuff angelist could be interpreted as violating the general solicitation rule but it’s tough to enforce lots of this stuff. tough to enforce lots of things on the internet.
“to enforce lots of this stuff. tough to enforce lots of things on the internet.”Key here is “lots” and probability. Not enough resources. No private party (ala trademark infringement or knockoff goods) with an axe to grind pushing the government (taking those junkets to China etc.)
“what constitutes solicitiation can also be somewhat subjective.”yep, which is why when you crack the door open wide enough for normal people to fall inside, you can’t expect them to know all the rules (whether they’re enforced or not).
Not taking sides but would also interject the probability of something actually happening even if something is technically illegal.
true, but still. its just silliness!
I don’t think you can technically be charged for solicitation if you are not either the party selling the stock, or an intermediary who could actually facilitate such a sale.And you would have to receive compensation in exchange for your advice to be charged with providing investment advice without a license.The First Amendment should protect you from exactly what you stated, though aggressive prosecutors do like to test the limits.
good to know. thanks.
.Solicitation is the act of an ISSUER or the agent of an ISSUER soliciting an investment in a security sponsored by the ISSUER.What you are talking about is TIPPING which can be illegal if you possess material non-public information and are making a tip based on that information.Offering an opinion as to the attractiveness of a potential investment absent material non-public information is called gossip. I think.JLM.
Spot on, Brandon. It’s baffling. Discriminatory. And categorically stupid. Even when the ban on general soliciation is lifted (Title II) in the next couple of months, only accredited investors will be permitted to participate.As for the rest of us….TItle III of the JOBS Act will allow all investors to participate but it looks to be quite a ways away. And even when it is implemented, there’s significant concern that it’ll be so burdensome that companies will avoid using it. Choosing instead to solicit only accredited investors to avoid the hassle. Of course, we won’t know what it looks like until we get there…Here’s what’s most infuriating: truly democratic marketplaces in other countries that allow all to participate are working. USQ portfolio co, FundingCircle is a debt-based platform in the UK—it’s crowdfunded more than $20 million for UK small businesses in the last month. Investors, regardless wealth, can invest as little as £20.We know it works. And every day our regulators sit idle—never mind transparency or accountability, of which they hypocritically ask of others but do not offer themselves—is another day the “average joe” gets bamboozled.Equal opportunity is a defining trait of our country. Yet we do not offer it in our financial markets. It’s just not right…
Ok, so one of my friends from summer camp (way long ago) – is soliciting money for a bicycle messenger delivery service within ny (coop owned) on facebook. They already have business lined up, and need the capital to actually deploy said business.She is in no way accreddited. I’m thinking of investing because I want to help my friend, plus bike messengers have a long history in NYC, and I know she is very organized (I’ve known her a long time)Did she do something illegal?
Too bad nobody cares to answer your question/s … Isn’t it nice to stop posting and just read ??
If she is soliciting or advertising on Facebook to sell securities in her company, then yes, she is likely doing something illegal.Tell her to read what the SEC has just done here:http://www.sec.gov/rules/fi…
Not legal yet!
I agree with JLM on the solicitation point – the advertising needn’t be limited to accredited investors, But 100% of the purchasers under new Rule 506(c) will have to be accredited and will have to be verified (new rules on what that means, too). The thing that is going to trip entrepreneurs up, initially, potentially, is that some new, proposed rules say that the materials used in general solicitation have to be filed no later than the first day they are used. So to generally solicit, to advertise, is probably going to take advance planning, a deliberate and premeditated advertising plan.
.The Reg D offerings will not be as easy as everyone thinks. The Rules are not yet fully published but there are some really draconian penalties — fail to file a Form D on time and you are in time out for 6 years.The SEC did not want this to pass and it was miraculous that Wall Street did not kill it in the cradle. Because it was called the JOBS Act, it was confused with, well, jobs.Jumpstarting Our Business Startups — haha, yeah, JOBS.The other big thing is that a firm which is raising money for itself does not have to use a broker-dealer if they are using the money directly. That saves 7-10% right off the top.I am predicting that this will have a 3-year run and that thousands of cases will be brought by the SEC.Reg D offerings and the accredited investor considerations have been around for a long, long, long time but these changes are really going to put money into play because of the low cash rates of return out there today.Remember Reg D can be used for both debt and equity.I own “TX-crowdfunding.com”, so I have some interest in this.Eeeehaw!JLM.
“SEC cases”? Lack of paperwork / Reg D filings?
.Garden variety fraud, most likely problem.JLM.
Listen to JLM everybody, all his comments throughout this thread. In addition to finalizing the lifting of the ban on general solicitation, the SEC yesterday also PROPOSED new rules for the Form D filing that, among other things, contemplate that those using advertising file their written communications with the SEC IN ADVANCE. So it’s not yet clear that the soliciting and the advertising can be ad hoc or freewheeling.
.I remember a conversation I had with a very salty securities attorney when this all started.He predicted that the SEC would require their approval of all advertising.I remember laughing at that notion until he pointed out that a prospectus, at the end of the day, is just type of advertising and one would not even blink at the notion that the SEC would require submission, review, critique, revision before placement.Makes sense given the regulatory mindset.I want a bit of the Wild West but maybe the Wild West AFTER they invented barbed wire?JLM.
I’d like to read the release a couple more times, but it seems to say that you need to submit your written materials to a site that the SEC will set up (not EDGAR; this new database of issuer material would not be accessible by the public), and you need to submit them no later than the day you mean to use them.One can imagine a Hootsuite or Tweetdeck kind of service that reminds you, “hey, if you are generally soliciting right now, toggle this switch and have your tweets concurrently filed with the SEC!”Madness.
Only ads for endeavors that further the agenda of the Federal govt will get approved.
.Here is the SEC’s fact sheet and press release. Everyone is surprised it got out so fast. The meeting was just yesterday.https://mail-attachment.goo…More info here also:http://www.sec.gov/news/pre…JLM.
Thanks for posting those links.
.I am fascinated by how easy it is to learn anything these days.A friend of mine — $500/hr securities lawyer which would be $1,000 in NYC — and I routinely look up stuff on the SEC’s website. He never charges me because we both have this crazy fascination with the changes to Reg D.I predict that done well, Reg D offerings could replace community banks who are no longer lending to small business anyway.I ran a public company for 13 years and was never intimidated by any of the securities laws. Of course, I never colored outside the lines either.If one can search and use NexisLexis and read reasonably well, one can learn anything these days.This is going to get very, very interesting.JLM.
Fascinating thought on replacing community banks. I did practice law for quite a few years. To this day my favorite reaction to my draftsmanship wasn’t quite intended as a compliment. We were laying off a ton of people at a public company. I was in house. The ERISA expert at our outside law firm couldn’t get the disclosures down to less than 18 pages. I did it on 1.5. His reaction? “That’s an economy of words!”
.The ability to write with that economy is a real art.A few years ago when the SEC began to require “plain English” docs, I had a lot of hope for the legal profession but everyone reverted to form.Lawyers who have been in private industry are the best.You can never satisfy anyone who has been in a litigation practice on anything. They think of documents as “evidence”.JLM.
My worry with the existing popularity of Kickstarter-style sites is that people will continue to conflate equity crowdfunding with product-based or emotional crowdfunding. Are casual investors of Ricks Picks et al who are throwing in maybe $1k going to be debating valuation or deal terms? Will these be equity stakes, convertibles, etc? We’ve been conditioned to give $100 without really knowing what we’re getting to businesses and ideas we love via Kickstarter, but this is a much more formalized, serious commitment.Will be interesting to see how things like reporting, documentation, etc get automated as small businesses build investor bases well outside of their inner circles of friends and families. Think a site like hippflow could be interesting in this.
That is going to be the biggest challenge as I see it. Professional investors have enough money at stake and knowledge to make sure there are a ton of controls in place. Both on how the money gets spent and how it gets distributed upon sale.When things go bad and even Fred will attest that happens 2/3rds of the time and that is with his knowledge and his dealflow that is when shit will hit the fan.You are seeing that right now with acquihires. There are investors taking it in the shorts, and frankly it would be much worse without those acquihires.
Acquihires don’t really help investors most of the timeThey help the employees and founders
That is exactly my point. Investors take it in the shorts in a acquihire. At least the employees and founders get helped which as an investor you can’t hate. But can you imagine what would happen if you had invested with very little terms and had absolutely no leverage?
“Are casual investors of Ricks Picks et al who are throwing in maybe $1k going to be debating valuation or deal terms?”If we can assume the 1k is a small part of an accredited investors net worth we can further assume that the investment (whether 1k or 10k) is in a sense “entertainment” expense and the investor has other reasons for “investing” other than “making money”. “Investor” has something to do and think about. As I have mentioned in another comment what we have here though is something that plays out of a long time period (so you get much for your entertainment dollar). Or I could argue “not enough intermittent reinforcement” taking the other side. Do you think all those people who give money to schools, colleges and hospitals are only caring about improving those institutions? Or are there other things psychology wise at play here by giving enough to have naming rights?
The Grandma Dotty investment strategy is fascinating in that results can vary greatly, depending on personality. I’ll take a guess that she was a quite sensible person with tastes that differed greatly from my eclectic, bleeding edge leanings.Some of my fav products ever were amazing and very unique/only option at the time, I didn’t mind the personal investment to hack them or put forth patience. That doesn’t work for mainstream, hindering financial blockbuster. I’m well aware, and therefore wouldn’t nec invest in every product that *I* personally like.Boxee (Box) seems like an excellent such example of a product I loved.
Me too. You win some you lose some. That’s why you need to make a lot of bets to get diversification
I’m calling it now: Ad networks for raising capital are on the way.
What were the old ad networks for?
Yeah…just saying there will be specialty ad networks for this kind of advertising.
“there will be specialty ad networks”Sure because you have so many new entrants who aren’t aware of the existing options that can do the same things today with a bit more effort. So they are fresh kill waiting to be caught.
Ad networks do seem to be the most understandable model for non-savvy people to understand – so probably easiest money, but in reality it’s probably one of the most competitive markets.
How about exchanges for re-selling privately shares you own. A secondary market for liquidity.
that sort of exists in two places I know. but, to me it has a bias built in. I want to sell my losers and hang on to my winners. I am not in the game to scalp. I can do that in the market.However, if you are an employee, the secondary non-standardized exchanges give them a place to monetize their human capital investment.
Isn’t that SecondMarket? …and there’s another player in that space too.
It seems that SecondMarket is quite stringent with their conditions. I would expect some new exchanges to take birth, after this new chapter.
I’m having trouble taking you seriously with that avatar, sorry. 😉
Woof Woof! I’m going to tell William.
ooo, you should start that. And then get a deal to secondary on finacial sites. I’m sure you can demand a create CPM for the secondary market
And people complained about an “A round crunch” last week…
Congrats to the lawyers. They’ve got to be excited.
As a former regulator who left that world of lawyers to start a company this is exciting news. However, as Fred mentioned it’s just a step and buyer beware. Boiler rooms on Wall St are coming up with new scams as we speak and unfortunately many Americans will be subject to fraud and lose thousands of dollars due to this act. The real question is whether the long term benefits of letting everybody get in the game will make up for the uneducated investors that get taken advantage of in the short term. Regulatory agencies will always be large, slow moving institutions and citizens should not rely on them for protection. Look out, do research and ask questions before investing.
I think investing in companies that sell picks and shovels to miners is a new theme 🙂
I truly am happy that this will get democratized.But it does mean that I will see another generation of starry eyed investors get their teeth kicked in. PC in 90’s;Internet in 2000; social media right now.Don’t get me wrong many great companies will be built and money will be made. There will just be a lot of people that don’t realize how hard it is. They’ll invest what they can spend not what they can afford and when the losses happen there will be wailing.
Yup. Buyer beware!
I think it is almost buyer be aware.I’m not talking about out and out fraud which there always has been and will be. Although that will probably increase.Things don’t work out the majority of time.Was it the idea, the market, the team, not enough or too much funding, etc.That is where it is hard not to take it personally if it is your money.
People will invest in the slickness of the presentation and the presenters rather than the fundamentals and the ability of those invested in to actually pull it off and use the money.
Yes. Although I’m not expressing myself well. I am not talking about when somebody took the money and blew it on their boat or family members or something like that.I’m talking about when somebody took the money, truly believed in the idea, things didn’t work out.That now becomes a kick in the ass because as the investor you will think, why did we waste money on this or not do that? Now I have to lose money?And its always going to be a shade of grey. Maybe they worked themselves to the bone and barely paid themselves, maybe they thought they could work bankers hours and get paid a ton. Maybe they made good decisions maybe bad.But in the end as the investor you didn’t even get your money back and that no matter what people say stings. If you have a ton of money and it was trivial then ok, but you still are going to look at the person that lost your money and think they didn’t deliver.
“but you still are going to look at the person that lost your money and think they didn’t deliver.”Possibilities:a) What they did was wrong – they are to blame. You did everything right and would do it again the same way (what you thought).b) What I did was wrong what can I do next time to avoid this again? What did I miss?Over time of course you have enough deals under your belt to see if you need to change anything (refine your thought process) to avoid “b”.I just had a deal that fell through based on assumptions that I made that were not correct. The difference is I have, say, 16 years using the same logic that is almost always correct. Had this happened with the 1st or 2nd deal I would be questioning the logic that I used. But at this point unless I fail multiple times I still won’t change the logic and I feel that I did the right thing in this case even though the outcome was not what I expected to happen. The good news is I don’t have to answer to anyone and I never ever discuss with anyone as a deal is happening so as not to disturb my thought process or cast doubt in a method that has in the past worked for me pretty well.
You crystallized my position. The vast majority of people will not be self aware and think b. So if you have many investors most will believe a.
Fred,The ban on general solicitation doesn’t get removed until 60 days after the new rule is published in the federal register. It remains to be worked out whether your post will be considered to be made on behalf of the issuer; maybe in the context of the new proposed rule requiring the filing of a Form D with all general advertising materials 15 days before first use of general solicitation.
Peter Lynch used to look up the companies his kids were buying products from at the Mall.He had some home runs with them too
A key success factor will be the availability of Quality investments, and not just the bottom of the barrel.This kind of bridges a gap between consumer and professional investment,- somewhere in the middle of this spectrum, maybe like a semi-professional consumer investor.This certainly has better odds than playing the lotto or gambling.
“better odds than playing the lotto or gambling”Intermittent reinforcement wise though the one difference is “t” or time.With the other types of gambling (lotto, casino, stock market) there is immediate reinforcement (not the days of Grandma Dotty holding onto stock anymore). Here it will take time for the results to play out.Appeals to a different gratification mindset.
Yup. New investor segment. New investment vehicle.
Meh, I know some companies that look riskier than a lotto ticket-because it costs more to play.
I’m sure you have seen your share 🙂
The cream of well done business plans and presentations will no doubt rise to the top.
This is a first step towards ending some pretty serious discrimination enshrined in our laws: reserving some of the best investments only for the rich and powerful.100% of people shouldn’t buy lottery tickets, but we don’t make that illegal.99% of people shouldn’t invest in startups, and it’s high time we stopped making that illegal too.Every unsophisticated friend or family member I know will be getting a “don’t invest a dime you can’t afford to lose 100% of” warning from me.But it’s still a great first step.
Even when you tell them that, they will say of course!But if (and I know this isn’t going to happen in your case) it comes time for them to lose money they won’t feel that way.Actually the worst isn’t an auger it into the ground complete loss. It is a haircut.
That’s true. But if you ask someone to sit down and visualize 100% of that money being gone…you will force some serious thinking and at least some will bail out of the greed moment and get real.Kahneman’s studies say losing what you already have is 2.5X worse to us as humans than not gaining what we were hoping to gain.
I don’t think the are going to get rid of the accredited investor criteria are they?I know in a sense that kind of sucks. But back to my point. I have had people that I know have a mortgage, car loan, and credit card debt want to invest in my company (I have never taken money from anybody other than an VC) Seriously you can’t afford it.I have seen the results too many times. Just saw one this month. We’ve built this interesting feature but we can’t monetize, do you want to buy it? That of course is not what they say but its what I hear.When you think I might buy that for $X and that is 25% of the money that was put into the company, you should hear the wailing of the angels.
Yes, JOBS act requires them to allow non-accredited investors to invest. They just haven’t written the rules yet.I’m not sure I will ever accept an investment from a non-accredited investor…but I do think enshrining that discrimination into the law is wrong.
.If you were to get each actual investor a tattoo on their chest, they would still disavow it when the shit hits the fan.JLM.
Could not be more true. Nobody remembers the downside.Case in point: at our sales events, just about every advisor raises their hand when I ask “how many had a client say ‘wait, the market made 13% last year, why didn’t I make 13%?'”They conveniently forget the advisor was also protecting them from risk all year long…
Much better said than I
Indeed – they should consider it a gift with no expectations. Some people aren’t honest though, with themselves – so hopefully you’re good enough at reading that and not taking money from someone you suspect isn’t / can’t be honest about it.
To be clear, I’m not sure I will ever raise money from non-accredited investors. And I prefer fundraising quietly.Just because I think something shouldn’t be illegal doesn’t mean I want to do it. 🙂
Well, accredited investors will have more to offer (potentially), and understand the risks more (likely). For early money, non-accredited investors (currently meaning they don’t have a certain network) can make sense, though I would never take it unless I personally was sure they’d get their money back within a relatively short period of time, or could keep equity for longer-term gain if they prefer.
By definition, though, you can’t be sure. Or it’s not an investment, it’s a gift.
There’s no free lunch here. The tradeoff for advertising to sophisticated investors is full disclosure about the beginning, the end and the size of the offering.
Like the democratization of capital, wary that the next scam will shut it down and make it worse.
Fred, thoughts on fact that a new entrepreneur raising startup or stage 2 money will have to take “reasonable steps” to verify their would be investor is ‘accredited’ and a safe harbor under the law might be to request investor’s tax returns (not just rely on check the box verification). How many would-be investors are going to send their income tax returns to strangers, no matter how enticing the investment?
Crowdfunding needs to move past the focus on primarily early stage investing b/c most of America doesn’t understand the fatality rate. It needs to focused as well on “balance sheet” investing – mature cash flowing businesses, that for a variety of good reasons, need additional cash.My company [email protected] is already working with several platforms to help solve the problem of trust that the industry says is their #1 issue. These platforms are generally underfunded, but there are 544 at last count around the world and the resourceful will survive and add tremendous value to the entrepreneurial ecosystem.This has elements to the credit card industry. Lots of value for the broader market, but also will increase fraud. The growth vector of the industry depends upon how they address the trust problem.
Do you think that a secondary market could emerge to enable liquidity for equity that was purchased in this manner? (something like secondmarket but with lower thresholds).
That seems almost inevitable.
Yesssss to the Yesssss!
My suggestion to VCs who want to avoid the backlash that will build up as regular folks start to lose their money in start-up investing is to open up the Twitters and Disquses to non-rich investors before their IPOs. If start-up investing becomes a ghetto where the non-rich only have access to the pickle companies, etc., the industry will eventually be in a pickle as the regulatory pendulum swings back.
Great suggestion but it’s the founders who largely control their cap tables
JOBS Act = Just Open Bucket Shops
actually think this could be a boon to funds with good integrity, transparency and reputation. Once investors realize how much blasted work goes into due diligence, working with, mentoring, etc etc etc, they might be happy to hand over their 2/20. It will take some time to work itself out-but the market will fragment and then reform into a state that it currently looks like with some changes.I suspect the changes will be in reporting, transparency, and fiduciary responsibility. Fred alluded to this in his Pando talk about the change coming in VC. I see bespoke VC on the horizon-but the LP’s don’t understand it quite yet.Fund managers have been demonized-and hedge fund mgrs get lumped in with bankers and VC fund mgrs. The general populace thinks its an easy rigged game. Hedge fund and banking might be a bit like that-but VC is not.but, the average Joe on the street hears about how Instagram was sold for a Billion after 18 mos and thinks that is the average. They don’t know the reality.They also think fund mgrs have it on easy street. They are unaware of provisions like clawbacks.
reality is a lot crueler and harder
It is just going to the be the same as the stock market IMHO. A lot of people are going to have no idea what is going on and lose tons of money. On the other hand there will be savvy investors that will make a killing that would have never had an opportunity before. Free markets people will go nuts about regulation, saying that letting people fail is part of an open market. Left-wingers will want people to be “held responsible.” It is easy to look at it from an entrepreneurs perspective of getting funding but I have a feeling there are going to be some crazy stories out there.After working on Wall Street for for a while I always felt everyone should need to pass some basic form of a test before investing, I don’t care if you are investing in startup, stocks, bonds etc. With social networks now people can even create the test collectively and vote on questions they deem important. It would be nice if there was at least something.
Oh goody, the releases are 116, 147 and 185 pages. Can’t wait to curl up on the couch tonight for a good read. If they’re anything like the proposed regulations, it will be 448 pages just to say “you really have to make sure the purchasers are accredited.”
Bo, Joe Wallin and I took a good faith crack a de-mystifying some of this when we live blogged the SEC meeting yesterday using the coveritlive service (which is awesome, by the way). http://www.wac6.com/wac6/20…But no question, lots to slog through. The proposed rules on what filings are going to be required, penalties for missing filings, things that need to be filed with the SEC before you can advertise, lots to sort through, no question.
I have an honest to god interesting startup witha cofounder that is scarily brilliant and great street cred on hacker news for both data science and python.It deals in analytics and optimization for merchandizing. The product will be one of those things that is subtle to the end user (helps them find stuff they like faster) and great for the companies that use it (makes it easier to make a sale based on cookie data and pass history)And we’re building. And I’m 80% sure that I might have found my first big parternship/early alpha saleThere: I have now solicited. Who wants in 😀 (For the record, I’m half serious and half joking. I don’t suspect it will be that easy to raise funds)
.People are getting very confused.You will be able to solicit the masses and only qualify them just before you close a deal with them. You will establish that they are accredited investors before you take their money.This is a change in the solicitation rules only.You are still going to have to make the appropriate disclosures as to your business and the securities. A good investment memorandum or prospectus or offering memorandum together with a good securities description and agreement.If you fail to make the appropriate disclosures, then that is garden variety securities fraud. If you make inadequate disclosures, that is also securities fraud.It has nothing to do with whether your audience for the simple garden variety fraud is accredited or not.JLM.
we’re pre that stage – as I said, half joking only because I am confused. Gov’t regulation and all
“So get ready for investment pitches on pickle jars, face creams, and bags of coffee beans. Entrepreneurs will be using their products as payloads for their pitches.” Here’s a crazy thought. Just as data privacy discussions are moving away from getting lawyers to draft ever-lengthening policies (and I am a lawyer-turned-entrepreneur) to designing product so ordinary people can understand what will and will not be done with their data, we will design products to balance pitching with disclosure.
I thought about this. Here is my biggest concern, and maybe this could apply to public companies, I don’t have the solution.When you have 2k investors investing $1k that sounds good because it democratizes things versus one investor putting up $2mm. Agree.However, it gives a ton of control to management because nobody really has the power/money at stake to challenge management.I want to double my salary as CEO after a shitty year? Great.Of course you can say you have board control but look at what happens to public companies even with the SEC.However, you put up $2mm….the shoe is on the other foot. I have a shitty year?? I am getting fired.
.Really smart CEOs are going to bring new money in as Reg D fixed rate debt with warrants and thereby not give up any control.JLM.
Yup and the masses are not going to know what they don’t know. That is the most dangerous position in life.
.I believe that for honest businessmen, the Reg D changes focused on debt are the low hanging fruit.JLM.
We have not one but two bets on crowdfunding debt markets
.Leader of the PackNot unexpected.JLM.
How would the warrants be valued or become liquid for the majority of companies that are not going to be publicly traded? Not being critical just trying to understand the warrant portion.
.In any private company transaction, warrants are valued by some formula that is developed by the company and ultimately gets back to discounted cash flow, some actual sale data or an arbitrary number pulled from the thin air.As to liquidity, arguably there would be next to none and one would have to realistically wait for a liquidity event to cash them in.The cap table for the company’s securities will reflect some number of shares on a undiluted and fully diluted basis. You would always be able to see them on the balance sheet.The warrants are a sweetener which might induce an investor to make a loan and get a kicker with a slice of an equity security.From the company’s perspective, warrants are not voting stock, so the corp governance is not compromised or diluted.JLM.
Thanks for the explanation – so in a situation where you have no expectation that the company would go public, would you as the CEO still offer/issue warrants with a plan to buy them back at a future date or would you not offer the warrants as a sweetener?
.I think you are purely in the realm of marketing, Joe.I can put my finger on a number of companies who have substantial cash flows who can service mountains of debt and would otherwise like to take advantage of “free money” in order to be able to pay a huge dividend to their shareholders.This might be particularly true of family businesses facing succession issues wherein the elder folk are getting ready to pass the company along to their children and effectively are withdrawing their equity in the form of a one time dividend.Bit of tax and structural planning and this could flow through tax free forever — stepped up basis at time of death.I have always said that the big low hanging fruit is going to be the Reg D debt issuance possibilities.Would you lend some money to a local 30 year old business with a great liquidation position given real estate owned free and clear and a substantial cash flow.If you could get 5% on a 5-10 year note?I think a lot of folks would do that with up to 50% of their net worth.Why?CD rates are so low.JLM.
I think the post deal issues around governance are the thorniest in this new model
suggestion: set aside X points to be sold at retail, in slices of $, $$, $$, $$$ like the kickstarter rewards program. goal is X, divided however.related: donorschoose does so many things so smartly. this in my inbox just now, via the campaign linked to from avc: their annual reporthttp://www.donorschoose.org…School’s out for summer, and you’re an important part of our yearbook celebrating the 2012-2013 school year.Thanks to you and your fellow citizen philanthropists, we’ve delivered books, art supplies, field trips and other resources to nearly 9 million students in public school.Take a look at the statistics and stories that capture what we accomplished together! We couldn’t have done it without you.Sincerely,Charles Best Founder, DonorsChoose.org
“SEC is not too excited about what they have just unleashed. But I am. This is a step, just a step mind you, toward the democratization of startup investing.”Let me summarize your glee as follows.More people getting money and taking more chances means more people that will need the type of investing that you can do that have passed various initial tests of viability. More people that have a proven model or team. As opposed to a group or guy with an idea that is not fleshed out yet which is more risky.More deal flow. What’s not to like?(SEC not happy? If I was a legislator and was trying to make this attractive to the SEC who opposed it I would simply sell them on the idea that I was going to make sure that their budget and power and bloat increased to be able to make sure the right thing happened. Who doesn’t want a bigger building and more desks under them?)
It will get interesting. The coming of more of the middle income bracket getting into early investment backs my belief in rounding the edges on AI that handles this sort of thing.Transparency will be needed.
This is all going to end well.
re “Do your dilgence. Diversify your risk.”im sure there are going to be some nice data saas businesses pop up to help people do that. seems angel list will be one of these
“I dont’ believe it should be relegated to rich people and professionals.”Hopefully, we’ll have more of the former and more behaving like the latter.”Let the games begin.Oh, wait you said that.
Fred and everyone who is interested in general solicitation:I’ve read through the comments to this post and have seen a lot of questions and frankly misinformation being shared. If you want to know about what the SEC has done, it has published its amendments to Rule 506 which covers general solicitation here:http://www.sec.gov/rules/fi…It’s a long document and maybe if I have a couple of days I will create some type of summary, but I urge you to either read it or share it with people whom you know who are interested.The rules on investor accreditation and how an Issuer (the company selling the securities) can legally determine investor accreditation have changed significantly. For example, the smaller the investment amount, the greater the effort the Issuer will have to undertake to determine accreditation. That’s just one criteria the SEC references.The SEC specifically states that the old way of just checking a few boxes is unacceptable, unless perhaps you are dealing with a QIB (Qualified Institutional Buyer). The rules are now more complex and the burden of proof to prove that an investor is accredited is squarely on the Issuer, especially an investor that is a “natural person”.As a result, Issuers of securities through general solicitation will likely be asking for much more information from prospective investors, in order to avoid liability. I can just imagine how eager the SEC will be to make an example out of someone who thinks they can get away with being sloppy. Note that is reading the SEC rules, the responsibility is on the “Issuer” – so pushing off the processing of determining which investors are accredited to some crowdfunding portal will not remove you and your company from responsibility. The SEC holds Issuers responsible for all aspects of the solicitation.So, to all of you prospective investors who want to invest $1,000 in your favorite company, be prepared to upload multiple years of tax returns, bank statements, paycheck stubs and investment history in order to qualify to send in your check.And to you prospective Issuers, the notion that general solicitation is going to be an easy and liability-free way to quickly raise money is not supported by what I read in the SEC rules. I urge you to inform yourself of the responsibilities to be required of you…
I’m an investor and Director at Rick’s Picks. The company is actively working on how to solicit investors not just on labels, but tattooed or engraved on each and every pickle. The slices and spears are particularly challenging but where there’s a will…
Fred,I took the liberty of quoting something you said during your June PandoDaily interview in an OpEd I wrote yesterday. http://pandodaily.com/2013/…It will be interesting to see how onerous a burden the SEC places on validating accreditation for those choosing to generally solicit private offerings.My understanding is such:No solicitation = Current simple questionnaire accreditation process (such as CircleUp has) that satisfies a “reasonability” testGeneral Solicitation = Greatly expanded process for determining accreditation (such as submitting access to banking info or previous tax returns)I’m not sure how many startups (myself included) would want to go through the expanded process for determining accreditation, although I’m sure there’s a company out there gearing up to offer this as a service!Best,Ryan
“Entrepreneurs that have consumer products, like Rick Field who has built Ricks Picks into a high end pickle brand, can now raise money on the Internet (he is doing just that now on CircleUp).”Hey Fred — just to be safe, you may want to redact the above. Isn’t it general solicitation ;-)?
Great post. It is important to point out that in order to solicit you will have to disclose full information, not just a blurb saying “I’m raising capital.”I think this is where a lot of people will get jammed up.Also, while the SEC lowered the bar for soliciting, they simultaneously raised the bar for identifying accredited investors. Now you have to take reasonable steps to verify an investors accredited status.If you get a chance, check out Crowdentials – they do just that – without disclosing the investors personal information such as tax records.I have found a lot of these types of services popping out of the woodworks in the past few days, but they all require an investor to provide tax records. Every investor that I have talked to laughs about this – saying that they will ever let someone know what they’re really worth.What do you think about this?
Fred, it would be great to see you write about these proposed rules, http://www.sec.gov/rules/pr…. If you read them, I think you’ll see the SEC is expecting something pretty out of the ordinary for startups–that is, 15 days before you pitch at an event at which people are invited by general solicitation/general advertising, startups are going to have to filed an “Advance Form D.”As a practical matter, I think a lot of startups are going to miss this. Then they are going to start their startup lives out of compliance from a legal point of view. What a terrible thing to do to the startup community–to put in place rules that will trip up a lot of people.We need, all of us, to write comments to the SEC on these proposed rules, and hopefully get the agency to move off this idea of a required advance filing before pitching in a manner that puts them in the generally solicited, 506(b) box.I know Brad Feld wrote a post. But we need voices. The more the better. And we need a lot of people writing comment letters.
Joe and I are working on an informational site. It is pretty darn rough right now but at least some information is there. https://s3.amazonaws.com/sa…See also Joe’s piece in the WSJ, http://blogs.wsj.com/accele… and my piece in TechCrunch http://techcrunch.com/2013/…
Bill, there are many things that are burdensome about the new rules, but the 2 that really stand out:1) advance filing2) 1 year penalty box!The 1 year penalty box is really onerous, especially coupled with the advance filing a lot of startups are going to miss.I think these rules are actually going to hurt the economy. They are that bad.
One hears, of course, that the proposed rules were a political compromise, to facilitate getting the final rules approved. But the startup ecosystem should not take chances! The SEC needs to hear why the proposed rules are so misguided.
Exactly Bill. That is exactly right. The SEC, in the proposed rules, said that they were proposing them in part because fo comments it had received! We need to make our voices heard. This is serious.