It is illegal to invest $100 in a startup in exchange for equity or options unless you’re an accredited investor.
Still, a website for crowd investing launched today: WeFunder.com. Even though the law that would make it legal is still being debated in the Senate, TechStars alumni and Startup Workaway co-founders Nicholas Tommarello and Nick Plante went ahead and built WeFunder and wrote a business plan anyway.
“We’ve built out the crowd-investing platform in advance of the law passing, and have put in a lot of thought into how to best protect small investors,” Mr. Tommarello wrote in an email.
A disclaimer on the site reads:
Wefunder is a crowd-investing platform for startups. Until the current law is changed (hopefully soon!), our invite-only beta is only open to accredited investors.
“We’re only going to choose one startup a week to feature; artificial scarcity will drive up quality,” Mr. Tommarello said. “And we will only choose startups with at least one accredited investor – the idea is that angels perform due diligence and professional mentorship, the crowd can throw in up to $1 million afterwards. That delays the date an A round is needed, enhancing founder control.”
Clever. But even though the House of Representatives version of the Democratizing Access to Capital Act (S.1791) passed in a bipartisan landslide, 407-18, it’s unsure whether the Senate will give the OK. The bill was introduced by Tea Partier Scott Brown of Massachussetts. “When we talked to Scott Brown’s team, they were optimistic their bill would pass,” Mr. Tommarello said. “However, we’re told that there is some skepticism that small investors actually want to do this, and that the dollar amounts invested would be high enough to actually help the economy. Which is bullshit, since nearly $100 million was spent on Kickstarter in the last year… for mostly art projects.
“It’s pretty absurd that politicians are happy to use crowd-funding to finance their campaigns, but don’t realize the same dynamic works for job-creation,” he said.
Laws prohibiting non-accredited investors from purchasing stock in startups were put on the books to protect the dull and the gullible — like little old ladies in New York and Baltimore who were swindled into buying worthless plots of land a smarmy door-to-door salesman said might have oil. Considering millions of people were recently sold mortgages they couldn’t afford, the need for consumer protection seems real.
But beyond the consumer protection argument and beyond the economic argument, opponents of crowd investing say it’s bad for startups. Startups don’t need a vast pool of undereducated micro-investors, the argument goes, they need savvy investors who know the market.
Considering how many startups raise their first rounds from friends and family, this argument may be moot. But WeFunder’s requirement that a startup have one accredited investor before signing up for the platform guarantees a modicum of due diligence.
You can’t invest in startups on WeFunder yet, but you can sign a petition to send to the Senate.
But before you do, realize that if the law passes, at least one consequence seems certain: there will be more startups. Do you really want that?