The SEC Has a Thing for Crowdfunding

Kickstarter is not a store. Indiegogo is not a store. No matter what crowdfunding platform you’re on, you’re not in a store. This is an undeniable truth, and no matter how angry you are about not being able to bring a cooler with a blender to the beach this summer, you did not buy this cool cooler, you were merely giving someone money to develop this cooler.

This reality may seem strange for the most vocal Internet commenters out there, leading them to the conclusion their pledge for a crowdfunding campaign was an investment. Surely there must be some guarantee in a single pledge, and if it’s not exchanging money for some consumer goods, it is exchanging money for a stake in a company. If that were true, backers of the Oculus Rift would have received several thousand dollars each, instead of a $600 VR headset.

Crowdfunding is not a store, and according to Kickstarter and Indiegogo, it is not an investment, either. Last week, the Securities and Exchange Commission’s rules for “crowdfunded investing”, “Regulation Crowdfunding”, or “Title III Crowdfunding” kicked into gear. Is this the beginning of slack-jawed gawkers throwing their life savings into a pit of despair filled with idiotic consumer products that violate the laws of physics?

All Hail Government Regulation

The turn of the last century was the wild west for investment in the United States. Unencumbered by any sort of regulation on securities, any fly-by-night operation could receive investments in an oil well out west, a gold mine, or a buggy whip manufacturing outfit. In the early teens, up until the Great Depression, states enacted their own laws concerning the sales of securities to protect investors from fraud. After the Great Depression, and thanks to a new-found use of the Commerce Clause, these state laws were cobbled together to create the Securities Act of 1933.

hackaday-bet-the-houseIf the Securities Act of 1933 could be summed up in one word, it would be, ‘disclosure’. The 1933 act requires companies to provide yearly and quarterly reports, financial statements, and other statements to the SEC. These reports are ostensibly for the benefit of investors, but not everyone can be an investor. For many types of securities, only accredited investors, defined in the United States as a person with an income above $200,000 per year, or a net worth above $1 Million, excluding the value of a primary residence.

A person who makes $200,000 a year is in the top 1% of earners in the United States, and the Securities Act, and subsequent Dodd-Frank Act, effectively bans 99% of the population from certain investments. Although giving people with more money more privileges may seem completely arbitrary and un-American, no one has ever suggested stupid people could survive in a libertarian’s paradise. By not allowing people to bet their house on an investment, everyone can keep their house.

Easing Restrictions For Everyone

For nearly 100 years, Joe Schmo has been cut out of the first rounds of investment for nearly every company. In 2012, President Obama signed the JOBS Act, backronymed the Jumpstart Our Business Startups Act, which gave startups the ability to raise money from everyone, not just the 1%.

The relevant section of the JOBS Act, Title III, is entirely dedicated to crowdfunding. There are many restrictions, both for companies seeking investment, and for investors themselves.

The companies targeted by Title III are very small, and crowdfunding of investment funds is banned entirely. For the investors themselves, the yearly limits on how much money they are able to invest is likewise very small. Anyone earning $100,000 or more per year may invest $10,000 or 10% of their income, whichever is less. Anyone earning less than $100,000 per year may invest 5%, or $2,000, whichever is greater.

As with any new investment tool, a number of companies have popped up to support this new age of crowdfunded investing. This is not a market Kickstarter is expected to target, and the smart money tells us they will not. Instead, new companies will pop up in the this freshly created equity crowdfunding industry. Already, these new investment crowdfunding sites have several successful campaigns. One of these crowdfunded companies can be best described as, “Uber, but only between LA and Vegas, and only in Teslas.”

I Know Who’s Getting Rich Off This…

By any measure, Title III of the JOBS Act is of little consequence. It’s for the person who wants to start yet another vape shop in a strip mall, but doesn’t have the capital to go it alone. It’s not the best way to raise money, anyway. According to SeedInvest, Title III crowdfunding doesn’t even make sense. It costs too much to raise money through Title III crowdfunding.

sec-jumperCompanies don’t get rich off of equity crowdfunding, and the investors probably won’t either. Investors simply cannot diversify, given the paltry yearly limits on how much they may invest. Fifty percent of businesses fail in the first year, and more than 90% within five years. You gotta diversify yo bonds, and limiting the amount that may be invested means this will not happen.

There is one entity that will make money off of equity crowdfunding: the licensed dealers and brokers. From the SEC rules, companies must sell equity through a licensed dealer. It’s unlikely non-accredited investors will get rich through equity crowdfunding. The limitations of Title III crowdfunding means the companies selling equity probably won’t be the next Facebook or Tesla.

Equity crowdfunding is here, and it’s not a Kickstarter. It’s not a store, and you probably shouldn’t invest in a company whose grand idea is a cooler with a blender, anyway. One thing is for certain, though: the best way to get rich is to invest in an equity crowdfunding platform.

31 thoughts on “The SEC Has a Thing for Crowdfunding

  1. I predict that within the next 3 years there will be two wildly successful crowdfunded ventures. The first will be reported as “oh that crazy internet” then the second will be all over the news media and suddenly every scheister, con-man and wanna-be millionaire will white-wash old businesses to put up on crowdfunding sites.

    You read it here first.

  2. More regulation please. Sanitize my life.

    “By not allowing people to bet their house on an investment, everyone can keep their house.”
    So we’re protected from these low risk gambles, yet have all these government approved avenues to make a stupidly high risk gambles? I’m not asking you to defend such a dumb statement, just don’t act like there’s even-handed logic behind it.

    “no one has ever suggested stupid people could survive in a libertarian’s paradise.”
    Desperate or unfortunate, not stupid, ….unless some gene combination makes you superior to the rest of humanity, don’t kid yourself. You’d make the same poorly informed choices ‘stupid people’ make if you had their life.

    1. There are absolutely many many stupid or at least lazy people. I grew up poor but took advantage of my public education while I watched many lazy people around me with similar or better opportunities squander them and now struggle to pay rent with mediocre jobs. These are the people who think just because they are born as Americans they are entitled to a good easy life and don’t see the point in education or hard work. I’m not talking about just desperate or unfortunate people here either, plenty of people who came from well to do families squandered it by being stupid.
      Maybe I’m naive but I grew up with the internet so I just googled everything I ever needed to know, no special genes required. I spent a good amount of my free time researching markets as a teenager and after years of looking for a way to get out of poverty I took to electronics and online retail as a low cost of entry opportunity, educated myself, and made enough money to pay for a state university in a major that I researched would give me good life prospects. If you are underprivileged and don’t have access to decent public education and internet I feel for you, the rest are just not trying.

      For the record I’m not a libertarian, I generally lean liberal, but I still think many people are lazy.

      1. I grew up long before the public internet existed. My parents gave no thought or conversation to what my sister and I would do after high school. No money was set aside.

        Fortunately, I was always a bookworm. I have always spent lots of time in public libraries reading and studying about electronics. I took apart a lot of things for parts from dumpster diving. I built a lot of things from books and my own designs or modifications to circuits from books. I rarely bought a kit, and even more rarely did I assembly a kit without modification.

        Sadly, working on my own and in little TV shops didn’t pay enough to pay for school. I did finally get lucky – I was laid off when the business I worked for closed, and that made me eligible for 2 years of tuition under something called Displaced Worker Retraining. So I now have a degree as an Electronics Engineering Technician.

        1. I’m glad you were lucky enough to develop under life experiences which gave you a good work ethic and an appreciation for technical things.

          Best wishes of happiness and a long life.

      2. The supremacist mindset, so popular with the religious, atheists, racists, sexists, nationalists, patriots, prisons, equality activists and tumblr.

        I guess that’s the typical way people look at it. We’re special little snowflakes and our success can be attributed solely to our genes, deity’s favor, or just egotistical tendencies, right? The world is too complex for us to be simple machines and the laziness couldn’t have a quantifiable real-world cause, right?

        IHMO; Although it’s a hard pill to swallow, we’re actually more similar than you’d like to imagine. Those lazy/stupid people, you like to feel superior to, were born into the world no different than you. Unfortunately this does mean you weren’t born special. Their laziness is just the integrated result of life experiences and your awesomeness might just be the result of a better set of experiences. Send your parents a thank you card if you think they helped.

        Just because someone is born with a silver spoon in their mouth or “great” parents does NOT mean they had a better upbringing either. I’ve never seen an adult that couldn’t be explained by their childhood environment. Spoiled kids with no appreciation for money/resources is obvious. Many were overprotected while simultaneously emotionally neglected so any form of risk/reward is now totally messed up as well. The same is true at the opposite end. I’ve seen lazy poor kids whose parents preached entitlement.

        Our experiences shape us.

        1. Our experiences absolutely shape us and I agree that childhood is responsible for a lot more than people give it credit for, silver spoon aside. I think there is still something to be said about random innate differences to at least some point, surely you have noticed very young children with very different temperaments, even among close siblings. Scientists generally consider most things 50-50 nature nurture.

          Are you generally a Calvanist? In your opinion is there any room in the human experience for self reflection, independant action, and self improvement? So many people by now have the shared experience of being told to google something to answer a question, and once you learn to do that you have an open door to experiences you seek out.

  3. Is that written correctly?

    “… Anyone earning $100,000 or more per year may invest $10,000 or 10% of their income, whichever is less. Anyone earning less than $100,000 per year may invest 5%, or $2,000, whichever is greater.”

    As written the 10%/5% is irrelevant because for the first case $10K will always be less than (or equal) 10% and for the second case $2K will always be greater than (or equal) 5%.

    1. You’re right about the 10%, but not about the 5%. 5% of anything over $40,000 is greater than $2,000. But yeah, 10% of $100,000 is already $10,000. 10% of anything higher than that would be greater than $10,000.

  4. The sites need to do more to police the projects. I backed the carmageddon kickstarter as the stretch goal was to develop a Linux build of the game, which they reached. I pledged the money in the hope that a big title like this would raise the plaforms profile as a gaming solution. When I last checked they are refusing to do a Linux build. Kickstarter don’t care. They have welched on the agreement we had.

    I totally get that the money I send is gone the moment I send it. I’ve backed a couple, most are late, I get that, but they don’t just turn around and say ‘you know, that stretch goal, even though we got the money we won’t do it now’.

    The best one I backed was git annex. I went on a backed an extension to the project as the guy was doing work that we all can benefit from. Stainless, are just a bunch of lying thieving con artists and kick starter don’t give two hoots….

    Crowd funding is a great idea just spoiled by greed. :-(

    1. You want gaming on linux? Start buying steam games on linux and when the needle starts to shift on market-share, developers will publish more cross-platform games.

      It also helps that supporting Valve will probably support their Steam Machine consoles, which I think (?) are still approximately a linux box.

      1. How about no. Incidentally, Stainless also promised a DRM-FREE version of the game – as in NOT ON STEAM – which is currently right there next to the Linux version: it doesn’t exist. The bastards can’t even be bothered to release what they already HAVE outside Steam, as they promised. Nor do they answer any questions on that, through any channel. So yeah, crowdfunding may not be a store, but some measure of accountability WILL need to be established, or the whole thing will end up a turn-of-the-century fad and a footnote in internet history.

  5. Admittedly, I haven’t backed many projects on crowdfunding sites (i.e., KS and IG), may be about a dozen or so total, but every single one has delivered. Some are on-time, some are late, some are very late, but they all eventually delivered what they promised. I even backed a #1 KS no-no (i.e., a 3D printer) and they delivered. (c:

  6. it’s like advertising, or online sales. Everything is fine until it becomes popular and the sociopaths f**k it up. Regardless if it’s a “store” or not, when promises are made, especially by the framework hosting the service that takes a cut of the potential product, and those promises are not met then there is a problem regardless of if it’s on Craigslist, KS, or the Yellow Pages decaying in your yard.

    It then becomes a case of “Police your own or we’ll do it for you” and there’s nothing the Fed loves more than an excuse to get some more control in. (“drones” for example)

  7. > If that were true, backers of the Oculus Rift would have received several thousand dollars each, instead of a $600 VR headset.

    A $300 development kit plus a $600 consumer headset actually, for a $300 backing.

  8. TL;DR how do we fix people who can’t actually do what they claim from getting rich? People who can actually do things like driver development and embedded design suck at marketing.

  9. Just gonna take this opportunity to warn everybody about fig.co which claims to actually do what the second alinea of this article suggests (you invest, and get a return in moneys) but there’s so many ifs and buts, its really just an elaborate scam.

    This video gives great insight; youtu.be/hFX0f_YUn1I

  10. While it would be a good idea to prohibit people from using there primary residence, their primary transportation, tools of their trade, and their rainy day savings to leverage vestments. The lower income sector should be able to invest as much as they want into anything they want. In the event I save a certain amount of money for the express intent of investing that money I should be free to invest it how I want regardless as to how much it is. A reasonable expectation would be that law enforcement prosecute any fraud that that affects my investment negatively, due diligence can’t always uncover all problems.

    Crowd funding could have great potential, it would be more interesting to read more articles on how that potential can be realized with less risk to donors.

  11. There are new equity crowdfunding platforms entering the industry almost every week. With different concepts as well, in terms of what they offer. You have to note as well that some other countries are more advanced, having different regulations and laws in place.

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