Why is the U.S. So Behind On Crowdfunding Startups?
Welcome to America, a land where, as an adult, you can legally gamble your money away at a casino, buy all of the cigarettes you can smoke, or kill yourself by fastidiously consuming fast food. Welcome to America, where, unless you're an accredited investor, meaning you have achieved one of the unlikely following things, you cannot invest in startups or any other crap, meaning that the rich will get richer, and you might as well put your money on the roulette wheel unless you're one of the following titans:
- a bank, insurance company, registered investment company, business development company, or small business investment company
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million.
- a charitable organization, corporation, or partnership with assets exceeding $5 million
- a director, executive officer, or general partner of the company selling the securities
- a business in which all the equity owners are accredited investors
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
- trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes
Now, I understand why the U.S. government, many, many years ago, wanted to protect investors from snake oil salesmen and the like, but in a day and age where folks like Zach Braff can use crowdfunding platforms like Kickstarter to raise more than $3 million from individuals who will never see a return from a film that will very likely make a profit, this is ridiculous. People should have the options to buy shares in any company or one-off venture that they want to give money to. (I mean, a Zach Braff "Production Diary" in PDF form is nice and all, but I think I'd rather have my cut of the profits ... ) As I've previously written, when a company raises $140,000 from crowdfunding, and sells itself a year later, the individuals who financed that company should certainly be privy to any profits.
But the American government, specifically the SEC is acting too slowly. Even though the JOBS Act was passed over a year ago, we've seen little in the way of permitting "unqualified" investors to kick in money to startups because nothing in the bill has been finalized or put into action. Sure, there will be scumbag startup founders out there who take advantage of people and have no intention to start/grow businesses, and there will be many more startups that try to succeed and fail, but there also may be some other awesome gems out there that cannot be funded without the help of the crowd.
In Germany, my friends Frederik Fischer and Torsten Mueller raised €250,000 on a site called Companisto, and now 25% of their company, Tame, is owned by the crowd! They got the cash they needed, and hopefully investors are happy too. They aren't alone. Across the United Kingdom, backers are investing in startups. For example, LawBit, a service that provides simple contracts raised £398K in exchange for 22.6% of the company! Plus, there are dozens of other companies out there that are getting their starts from online crowdfunding.
In America, you still either have to know people or be in the Silicon Valley crowd, otherwise there's little chance that you'll raise a dime from anyone who is not a friend or family member.
Yet our American Congress, a veritable bunch of bozos and buffoons, will not listen to this argument until one of Europe's crowdfunded companies sells for one billion dollars. And while investors should still be smart with their money, and I understand the legitimate concerns that there will be fraudsters out there (and send them to jail!), we must get over this hump soon, as anyone who's not already an investor won't ever be able to get in the game, further creating an America of haves and have nots!