Tag Archives: seed round

Crowdfunding Back On Track — As Milk Train, Not TGV

Crowdfunding Back On Track — As Milk Train, Not TGV

A few months ago, in the heat of debate over the JOBS Act in Congress, I penned an in-depth critique of the portion of the JOBS Act seeking to legalize crowdfunding in the United States. As I argued, the version of the JOBS Act initially approved by a bipartisan majority in the House of Representatives was a brash experiment in targeted radical deregulation of financial markets that would have come on the heels of one of the worst economic disasters in American history — itself attributable to deregulation with inadequate oversight — while the asthmatic U.S. economic recovery continued to wheeze and stumble through the smoldering wreckage of once-mighty financial institutions.

As background, JOBS Act-style crowdfunding legislation — which would more properly be dubbed “crowd investing” or “equity crowdfunding” to differentiate it from other models such as Kickstarter, a funding platform for creative projects — is a form of market deregulation aimed exclusively at investors who by definition have assets or income placing them squarely in the middle class and are making investments so small that in reality they have neither the leverage nor the economic incentive to demand adequate disclosure by issuers. As I wrote previously, an economics professor could hardly dream up a better textbook example of market failure for a final exam.

Invisible Hand
In a world populated by human beings, not saints, this dismal outcome is inevitable, a classic “race to the bottom” propelled by the invisible hand of profit maximization.
 The reason the sale of securities is regulated at all is that these markets are otherwise guaranteed to fail, spectacularly, with massive windfall gains accruing to the most aggressively dishonest hucksters; legitimate, forthcoming entrepreneurs crippled by an inability to match outsized returns that could only be produced by fraud when competing for investors’ dollars; and the most vulnerable members of the general public fleeced with little recourse.

In a world populated by human beings rather than saints, this dismal outcome is not merely possible; it is inevitable, a classic “race to the bottom” propelled by the invisible hand of profit maximization. A confidence crisis created by widespread losses and disillusionment among investors can cause catastrophic market collapse (as seen in 1929), with protracted macroeconomic misery until that confidence is restored. It’s no coincidence that Congress passed the Securities Act in 1933 and the Securities Exchange Act in 1934. Crowdfunding in its purest form would shred both of those laws under the presumed theory that if the amounts invested are small enough, it simply doesn’t matter if individuals choose to gamble in a wholly unregulated market.Continue Reading

The Great Crowdfunding Train Wreck of 2013

The Great Crowdfunding Train Wreck of 2013

What sort of business operators can we predict will be disproportionately drawn to using a funding mechanism that is designed from the ground up to leverage a large number of middle-class individual investors with minimal bargaining power under circumstances involving minimal disclosure, toothless corporate governance and little-to-no liability to shareholders?Continue Reading

Avoiding “Janitorial” Legal Work for Startups

Avoiding “Janitorial” Legal Work for Startups

Guide to laying the legal foundations of a successful startup company by startup lawyer Antone Johnson, Founding Principal of Bottom Line Law GroupContinue Reading

Convertible Note Financing 101 for Startups

Convertible Note Financing 101 for Startups

A key advisory role of startup lawyers in my opinion is to level the playing field by bringing our own perspectives to bear, having gone through the twists and turns with many clients over the years. Knowledge is power.Continue Reading

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