Making Entrepreneurship Harder
The Free Market Project wonders why the government wants to make it harder for entrepreneurs to attract investment capital.
This is the same government that has no problem with the poorest people in our society, or anyone else, playing the lottery every week, or heading to an Indian casino or Las Vegas. For certain, they don't have an income limit on who can contribute to a political campaign, despite the fact that there is generally no pay-off for that unless you're able to contribute thousands or bundle tens or hundreds of thousands in campaign donations....
My question is this: With the transparency possible using the Internet, why aren't average citizens able to spend small amounts of money (like, lottery ticket money) on seed-money investments? With proper transparency and protections in place, why aren't entrepreneurs allowed to put their idea online so that the average Joe (or anyone) can look at what they're doing and invest in it if they like the idea?
morganovich:
for that matter, what right does the government have to stipulate that only "accredited" investors ($1mn in assets apart from your house) or "qualified" investors ($5mn in assets ex house) can invest in start ups or other "alternative" vehicles like hedge funds and private equity funds?
it's your money. who are they to tell you where you can and cannot invest it or whether you are qualified to make such judgments yourself?
July 7, 2010, 3:00 pmStan:
I must admit ignorance on this. I had no idea I couldn't invest, nor seek small investments in a start-up. I've been thinking of starting my own business, but clearly, I have a lot more research to do. By the way, that is effing ridiculous.
July 7, 2010, 4:57 pmStan:
"You’d think that advertising an investment opportunity (even with a simple website) would be a good way to get people who know something about a particular industry to see and understand what the entrepreneur is trying to accomplish and either support it with investment, or not. But, the government doesn’t allow that."
That has to be some kind of 1st Amendment violation. Anyone willing to fight it in court?
July 7, 2010, 5:02 pmtxgolfer:
The govt is a proxy for Big Biz and they work together to make sure they get first dibs on any new ideas.
Harry Markopolous for President!
July 7, 2010, 5:06 pmRoy:
Been a while since I looked at a dead tree newspaper classified section. Recall that some part of the classified often had ads re people seeking investors. See no reason 'net could not do similar.
July 7, 2010, 7:44 pmCarl Nelson:
Study some history on what was happening to induce "truth in advertising" laws and "accredited investor" rules and SEC limits for IPOs. It was snake oil scam unlimited, resulting from "information asymmetry."
July 7, 2010, 8:19 pmmorganovich:
carl-
so the correct answer to fraud is to limit investor choice?
talk about blaming the victim...
hell, ban investing altogether and you'll decrease investment fraud 100%...
July 7, 2010, 9:03 pmdavid foster:
Carl N..."information asymmetry"...how do you feel about state lotteries with their very large advertising budgets encouraging hopes that are almost certain to be disappointed?
July 8, 2010, 6:21 amJames:
Am I missing something? How is government stopping anyone from going online and seeking small amounts of seed money from individuals (ie Kiva, a million other websites)? Or, are you upset that the government isn't doing more to promote such services?
July 8, 2010, 8:05 amMark:
There are some groups that allow you to make micro-investments in other people. Either allowing them to pay their debt more reasonably ore giving them seed money for their investment plans.
One such outfit is http://www.prosper.com and you can invest as little as $50 in someones project. You get to see an initial credit rating. The person writes down the basics of the business plan ...
The loans are for less than $25,000, and you can have up to 500 people loaning you the $25000 (at 50 bucks per pop)
It is called Peer to Peer lending.
July 8, 2010, 9:59 amMark:
They way they work is that they start out at a high rate, and you put in your minimum rate you would loan to the person, as more people come in the rate goes down. Bid your 50 bucks, and then if the person gets enough people to fill the loan you get a contract. Typically though they end up about 9% so you see someone with a good plan, and good credit. The company - prosper will take about 1/2% to cover their costs and profit, and the rest will go to you as monthly payment until it is paid off.
Prosper.com is the most pure lender, in that you see the client and make a decision based on the plan and financials. In addition to prosper there is lending club which is not as pure and seems to mix social networking like facebook with lending, cuz you are more likely to get a loan from friends. I don't like their model as much because you also are much more likely to make dumb emotional decisions when it comes to friends. I also think there are others, like Kiva, where you basically are donating your money for third world start-ups, and if it is payed back you can donate again.
July 8, 2010, 10:12 amPat:
Carl-- Good point about information asymmetry. That is where technology has made the old rules unnecessary. With the Internet and some simple rules about transparency, the investor can know what they need to make a decision, and to track performance of the company. It would be interesting to know how many regulations were put in place when it was difficult to gain access to information and sources were limited. Given new technology and capabilities, why not update regulations?
Mark -- There is a difference between a loan and investment. First, a loan has to be repaid, investment is a risk taken that your ownership in the venture will pay off. Second, the lender expects X percentage return on the money loaned, which will end when the loan and interest are repaid. The investor hopes his ownership will return far more than the amount of investment, and will continue to reap profits into the future. Loans are simply not a great start-up funding method for many new ventures. It's great for some types of ventures, but for things like new technologies or other innovations, loans are a bad idea both for the lender and the borrower. The greater the risk, the less a loan is a good idea. We found that out with the housing bubble, right? And real estate is generally a "safe" bet for a loan because the asset is tangible. With technology or innovative products, the asset is basically an idea.
July 8, 2010, 12:20 pmMisha:
I would love to have something like Kiva for investing instead of just charitable loans
July 8, 2010, 1:17 pmcaseyboy:
Wait a minute. I recently made an investment in a great opportunity in Africa. All I had to do was send $15,000 so that the government of Kenya would release the contents of a lock-box found on a sunken barge in the Tana river. Contents expected to exceed $10 million in Ivory and jewels. My cut should be over $2 million for my $15k investment. Beat that Mr. Buffet.
July 8, 2010, 2:15 pmJim:
I have invested a little money on http://www.prosper.com. It is a form of crowd-sourced loans. Borrower "Joe" posts his project; debt consolidation, business expenses, car purchase, etc; and lenders bid amounts of as little as $25.00 while specifying interest rates. The micro loans add up until the specified loan amount, i.e.$15,000, is raised.
Bidders compete with interest rates so the borrowers can usually get attractive rates relative to their creditworthiness. All loans are 3 year term, but there is an aftermarket for re-selling any notes you own.
I believe it is run through Wells Fargo with the bank taking a simple 1% cut of everything.
July 8, 2010, 2:34 pmBob Smith:
"How is government stopping anyone from going online and seeking small amounts of seed money from individuals (ie Kiva, a million other websites)?"
By issuing cease and desist orders, and if you don't comply throwing you in jail. It is illegal to publicly advertise a private offering. Bear in mind that what the SEC considers public advertising isn't what you or I would. Telling all your friends would likely violate the prohibition. Technically, you can't tell somebody you have an offering before you know if they're accredited. You might then wonder how you find accredited investors without telling them you have something to offer them. Now you know why Wall Street wants to keep the right to publicly advertise all to themselves. The series 7 is no guarantee of quality or honesty, but it does serve as a barrier to entry. What would Wall Street do if everybody, not just the ultra rich, knew about and could invest in private offerings? The loss of management fees would be catastrophic for them.
July 9, 2010, 11:54 amKen:
Could do it with a darknet, probably.
July 10, 2010, 8:02 amCarl Nelson:
Pat: True, the Internet makes more info available faster. But for a scamster, it merely produces marks faster and easier. Since private companies don't have to produce auditable public reports, there is no reasonable way that someone not intimate with the particular industry could sort out truth from fiction in a proposal. Look, for example, at all the "pump and dump" schemes littering the stock markets. While there's nothing basically wrong with people investing in dream machines, but they should have some protection from liars and swindlers. If that means a higher barrier for honest entities, at least the greater good of trust in markets is served.
July 11, 2010, 3:40 pm