Crowd-funding your startup - and Social Net Worth

Matthew Ingram asks an interesting question about startiup funding, based on seeing a post on Twitter from the ex Jobster CEO trying to raise funding for his new startup:

“socialmedian is raising some more angel investment now. $25k-$100/investor, up to $500k. Interested parties can contact me directly.”

But raising money in this way is illegal - talkin' about raising funding on TechCrunch:

Great way to get investors, right? Exactly not - the whole purpose of the Securities Act of 1933 is to prohibit public offerings like these unless accompanied by a registration statement and a valid prospectus approved by the Securities and Exchange Commission (the fun stuff is in Section 5). The Twitter also violates various state laws.

However, as Matthew notes:

Why couldn’t someone “crowd-source” a financing for a startup? Why not amend the Securities Act to allow posts like Goldberg’s? The SEC has said that blogs can be used for Regulation FD disclosure — why not allow blogs and social networks to play a part in the raising of money?

There are some interesting precedents - a startup sold itself on eBay a while ago, and others have followed suit. There is a rise in various web based microfinance initiatives, and videoblogging service Phreadz developer Kosso has a voluntary "Phreadz Phund" on the website (please give generously, its rather good).

As TechCrunch notes, its is theoretically possible to do this legally - however, the current restrictions were brought in for good reason:

Most venture financings are excluded from Securities Act registration via a private offering exemption. But the key to these exemptions are that they aren’t disclosed publicly and the investors must all be high net worth individuals.

In other words, this is exactly the kind of offering the law is designed to stop in order to protect individuals

Though as Matthew notes:

It’s not as though millions of people haven’t been just as impoverished by “qualified” investments and prospectuses as they could ever be by investing in a Twitter financing. Why do we need the government protecting us from ourselves?

Having been around this block with Angel investments, I know the the basic argument is that the "high net worth" stricture means only people who can afford it are eligible to be taken to the cleaners in this form of gambling, and its based on painful experience of many a bubble (look at the dotcom bust for example).

However, the proposed approach reduces transaction costs in this space hugely, as it connects startups with investors in as direct a way as possible, and entire tranche of middlemen disappears - so that's where the economic pull will be from. Similar forces acted in share trading after all.

Nonetheless, its a fascinating idea - and take it one step further - its then possible to create an online bourse where people who invest in startups can then trade their investments - and it would function as a prediction market at the same time. The issue would of course be the same that plague larger markets - (i) getting the company to tell the truth about itself, and (ii) to stop the system being gamed by hucksters.

Perhaps this could be partially mitigated by another thing I've had in mind for awhile - setting up an Investment Social Net, where there was some form of pre-qualification, and basic reporting requirements for the startup. A Social Network for Social Net Worth

Hmmm...and maybe we could fund the running costs of Broadstuff this way too