In this article (link here) the new rules for startups looking to raise equity are outlined. These new rules will make it easier for firms to raise funds, allowing more investors to buy shares of these risky investments.
For all of America’s perceived openness to innovation and finance, regulators have energetically restricted the ways corporate tiddlers can raise money. The general public has been banned from risky, early-stage investment opportunities, all in the name of consumer protection. That will largely be reversed from May when rules approved by the Securities and Exchange Commission (SEC) on March 25th come into force. These will overhaul the process of raising equity in ways that will make it far easier for firms to finance themselves, even if consumers will have to keep their wits about them.
The most controversial aspect of the rules is tied to who may invest in such offerings. Typically access to anything out of the ordinary requires an investor to be “qualified”, meaning those with a net worth of $1m or an annual income in excess of $200,000. Now anyone will be able to invest up to 10% of their income in early-stage ventures, a type of investment that makes stockmarket gyrations look dull.
Sceptics worry that crowdfunding venues will become a playpen for fraudsters targeting the poor and credulous. Much the bigger worry is that startups have a tendency to go bust. In Britain, where equity crowdfunding is already thriving, regulators have warned investors it is “very likely” they will get wiped out. For every Apple, in other words, there will be many, many more lemons. That will still sound like a reasonable trade-off to lots of American investors.
I found it interesting that regulations are being decreased in this area after we saw the effects of too much risk taking in the financial crisis. Although this could help spark innovation, it could also lead to investors taking risks they can't afford to take.
Do regulating agencies have any business regulating who can and cannot invest in risky start-ups or should it be left up to the investor to decide what risk they are willing to bear? Could this lead to a start-up bubble?
I think that this a great development. While I'm definitely far from being alone or the first to call it, crowdfunding is "the next big thing." However, crowdfunding currently has no appeal to investors seeking a return, because there's not a share based system, and crowdfunders tend to get their return in the form of gifts or exclusive footage. An equity based crowdfunding platform would be the most revolutionary transformation in business/ finance, since outsourcing non-essential functions after Japan Inc in the 1980s.
ReplyDeleteI also don't see many detrimental effects, because the most recent financial crisis was perpetrated by institutions, and their wrongdoings trickled down to individuals. Moreover, these financial institutions bore absurd amounts of risk and downside exposure like never seen before. The individuals being included in this legislation simply don't have enough power to bring down the system.