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Equity crowdfunding In a comment on my previous post, Mastiff wrote, “It is easier for me to buy stock in Microsoft than it is for me to buy equity in my friend’s clothing design business down the street, thanks to the state of securities law. So which will I tend to do?”
Which is a very good point indeed, and something I had not really considered that now seems obvious. It is just another way that large incumbents can use the state to stifle competition.
However, I have not read the Financial Conduct Authority’s policy statement on crowd funding, but there do seem to be some interesting ways of investing in small companies. Have a look at Abundance Generation, Seedrs, Bank To The Future and Crowdcube.
In the USA, there was the Jumpstart Our Business Startups Act, and Rock The Post offer startup investing.
Is this the start of something world-changing, or is it set to be stifled by too much regulation?
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Absolutely nothing at all to stop you buying stock in a friend’s business. In the UK that is. You can invest as much as you like as often as you like. The US is rather different though….
Tim,
Would that be regulations from the ‘war on drugs’ and money laundering? Or is it an older scam, er scheme to ‘protect’ investors?
To date, how many crowdfunding (type) appeals have proved to be outright fraud, with no recourse?
“My Nigerian uncle only needs a small fee to release his “found” millions to your account…”
“Make money stuffing envelopes….for the children!”
“Invest in our diverse portfolio of underperforming stocks…TODAY!”
Mastiff’s comment isn’t entirely accurate. Yes, investing in a listed stock is as easy as opening a retail stock brokerage account and placing the order. But a one-off private investment in a friend’s business is only as complicated as your lawyer wants to make it. If your friend is soliciting investments from a lot of people he’s going to run into the federal securities laws, which can be extraordinarily complicated (there are various exemptions), but if you want to give him $10,000 for a 5% (or whatever) share of the company it isn’t particularly difficult. But overall the point is a fair one: federal securities laws can make raising capital complicated and expensive. The stated reason is “investor protection”; the extent to which that objective is really served by the current law is debatable, and it clearly creates a barrier for smaller entities.
I’m no expert, but I believe that the JOBS Act (at least as currently being implemented) only permits investment by “accredited investors”, for whom a number of registration exemptions already existed, so I’m not sure how much difference it will really make. If and when they open up crowdfunding to non-accredited investors (I understand that proposed regulations for this have been published) it might begin to make a difference, but there will still be a lot of restrictions and limitations. We’ll see.
At least in the US they require investors in crowd funding to be “accredited”, i.e wealthy. They either need to have $1 million in net worth (*not* including their primary residence) or have an extremely high income (I forget the figure). There is pressure now to raise those requirements to perhaps $2.5 million net worth or an even higher income. Existing companies don’t like competition, and they will do their best to prevent if from arising. Check the Angel Capital Association in the US for blog posts about their fight against raising the requirements. The crowdfunding rules also raise the level of scrutiny a business is forced to use to ensure an investor really is well off, and some investors may not wish to give up their privacy.
In the US even if you don’t crowd fund they stack the rules to make it far easier to only take money from accredited investors. They also appear to be poised to be more strict about determining whether you are crowd funding, if you mention too publicly that you are seeking investment they may decide you are crowd funding which rules out taking money from non-accredited investors. There are ways to do private placements to the general public but they require far more expense for a private placement and effort to create disclosure documents.
Well one good side of the coming (de facto – if not legal)bankruptcy of the modern state, is that its regulations may go as well.
But let us hope it is a moderate collapse – a DISCREDITING of statism.
Not a full scale collapse – the fifth century collapse of Rome was NOT a good thing for the people at the time (or for many generations later).
It is immoral to let a sucker keep his money.
When Gubbmints interfere in the market it should be called Equity Clownfunding.
Fred Z sounds like a con artist. They all justify what they do with similar sayings. Unfair, or unequal, treatment should not be a part of the moral philosophy of any libertarian code of ethics.