It may soon be easier for small companies and start-ups to raise cash online. Congress has just passed legislation that opens the door for average people — no matter how rich or poor — to become an investor in a new company. Currently, investors have to be accredited — essentially proving they’re worth more than a million dollars — not including their home.
Entrepreneurs are applauding the passage of the so- called “crowdfunding bill.”
Naval Ravikant is the CEO of AngelList — an online business that pairs investors with start ups. He’s a strong supporter of the legislation.
Mr Ravikant, walk us through how this would work. Let’s say I have an idea for a new company, can I just pitch it online — to find investors — is it really that easy?
Naval Ravikant: Not quite. To be clear, today at AngelList we only deal with accredited investors, but crowdfunding opens up the door for non-accredited investors. Non-accredited means they have less than a net worth of a million dollars. These are people today who can spend their money gambling, they can do it in commodities, penny stocks, derivatives so there already all kinds of risky investments they can make. With crowdfunding they’ll have the ability to participate in small amounts in start-up companies, which can be risky and can be dangerous, but often no more than other investments.
Tara Siler: There are some concerns about this legislation — and some come from consumer groups. They say this change could expose small investors to fraud. How do you respond to this concern?
Ravikant: Honestly, I think it’s a little overblown. Anytime you invest money there’s always losses, but in terms of actual fraud, if you look at the bill that passed through the Senate there’s huge liability and legal disclosure required for people who engage in outright fraud. There are already laws on the books against fraud and if anything this bill strengthens them. And, nobody gets any money unless everybody in the community passes certain thresholds. There’s this wisdom of crowd effects going on. Kickstarter has done a great job with donations and sort of pre-paying for products in the space, which is what inspired crowdfunding in the first place.
The U.K. platforms to date report zero instances of successful fraud and there’s all kinds of disclosure regulations, legal recourse, and of course community tools built into this bill. So, I think people could lose money the good old fashioned way, which is you make money on an investment that goes sour, but I think the fraud opportunities are actually fairly low.
Siler: One of the changes under this bill is that companies can now announce publicly, in a very big way that they’re interested in raising money.
Ravikant: Correct. There’s been a regulation on the books for a long time around general solicitation, which means that a company or a fund may not publicly declare that it’s raising money, even if it is only doing so from accredited and sophisticated investors. So, the bizarre outcome of this old rule is that you can actually meet somebody in a bar and offer to let them invest in your fund, but you cannot, for example, take out an ad in theEconomist or you can’t even tell a reporter for the Economist or for KQED that your fund or your company is currently accepting money.
Siler: Will this also help small Mom and Pop stores as opposed to the digital world?
Ravikant: I think that’s where the crowdfunding part will help. The general solicitation part will probably help the Silicon Valley types trying to reach accredited investors, but the crowdfunding part is really more designed to help, for example, a Phiz coffee or a Bluebottle coffee in San Francisco. They have incredibly passionate, loyal customers. They have trackable and traceable audits and revenue streams. They’re having a hard time getting loans from banks, but they could raise equity capital through passionate, loyal consumers and crowdfunding.
Siler: Thanks for being with us today. Naval Ravikant is the CEO of AngelList. The crowdfunding bill now goes back to the House to resolve changes made in the Senate. President Obama has already said he plans to sign it.
- Naval Ravikant: CEO of AngelList
>About STARTUP EXEMPTION:
Startup Exemption is the name Sherwood Neiss, Jason Best and Zak Cassady-Dorion created to describe their CrowdFund Investing (CFI) framework. The framework is an exemption under Regulation D Securities Offerings that would allow startups and small businesses to raise a limited amount of seed and growth capital from their social networks using SEC-registered websites. Their framework was the basis for the three Crowdfunding bills considered by Congress and was endorsed by the President. It passed the US House in November, 2011, 407-17 and the US Senate on March 22, 2012 as part of the JOBS Act 73-26. The path from idea to law in 579 days can be found at: http://www.startupexemption.com/.
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