• Sharebar

It looks like crowd funding legislation is only going to get more and more relaxed.

I know a lot of companies are salivating at the idea of being able to raise money from non-accredited investors, but I can't see this ending well. Funding for startups has always been difficult, but the assumption was the the average accredited investor has the financial expertise to conduct reasonable due diligence.

The average worker, however, likely does not. I think there will be a spike in people giving their $500, 1,000, or 10,000 investment (which to them is a lot of money) and being very disappointed by the lack of liquidity (which no matter how much you tell them its a 5 year lockup, they'll be banging on your door in 3 months) and failures. Multiply this by millions of investors across North America and it could turn very ugly very fast.

I can only see this being bad for startups which actually have solid business models and have been able to raise difficult funding as the "good" startup will be replaced by the startup that has the most aggressive sales team.

Interested to hear WSO input.

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Comments (7)

  • guyfromct's picture

    If people don't know what they are doing they shouldn't play. I think solid start ups won't have an issue, they will still have access to VC/Traditional Angel/Growth PE, they will still get the smart money. It seems like if you are smart and circumspect the secondary market might be very interesting.

  • moneymogul's picture

    imallcash:
    It looks like crowd funding legislation is only going to get more and more relaxed.

    Interesting. Where are you tracking the progress on the legislation? I understand that all the regulations are supposed to be hammered out finally within the month?

    "Be a yardstick of quality. Some people aren't used to an environment where excellence is expected." - Jobs

  • In reply to moneymogul
    imallcash's picture

    moneymogul:
    imallcash:
    It looks like crowd funding legislation is only going to get more and more relaxed.

    Interesting. Where are you tracking the progress on the legislation? I understand that all the regulations are supposed to be hammered out finally within the month?

    I'm not directly tracking it, however, I work for a startup that is looking to exploit the lax rules and see cause for concern. Obama is pushing the jobs act forward with the intention of creating jobs by stimulating startups through ease of acquiring financing. I actually like the accredited investor hurdle requirement, because it limits the supply of funding which moves funding towards the best startups. I think we will see the amount of startup failures spike if/when the rules loosen, as a lot of startups don't market their offerings as risky as they should. An accredited investor, in my experience, can see the risks and know the questions to ask. A non-accred (in general) doesn't understand the risks, which is where I see a major issue if the flood gates open.

    It's all manipulated with junk bonds. You can't win.

  • In reply to imallcash
    NutKnife's picture

    Do you think it's the government's responsibility to make sure non-accred investors don't get played? I wonder how Kickstarter will change, if it at all.

  • Ed Rossiter's picture

    Crowd funding really should have a place in society but how can risk be quantified so information is more asymmetric? Perhaps caps on the amount that can be invested - say $500 That will limit exposure.

  • In reply to NutKnife
    Ed Rossiter's picture

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