Our Outdated Securities Law are Stifling Small Business Innovation
Posted by Ariel Seidman | August 20, 2008
Michael Arrington recently caught an entrepreneur trying to raise money for his startup via his Twitter feed —a clear infraction of various secruity laws from publicly raising capital to raising capital from non-accredited investors ($200K+ annual income or greater then $1M net worth), and various others that a corporate securities lawyer would quickly find.
Beyond the rather humorous back and forth between Arrington and the entrepreneur is the larger question… Are these securities laws created in the early 1930’s in response to the market crash and Depression still relevant in 2008?
To the best of my knowledge the only person to challenge these laws in any type of serious manner was the founder of a small microbrewery. Wit Brewery as chronicled by Andrew Klein (founder) in his book Wallstreet.com successfully raised a few million dollars allowing them to expand marketing and distribution outside their initial core market in NYC. After multiple unsuccessful VC pitches Andrew turned to the web in the early 90’s where he published a prospectus that users could download, review, and if interested send them a check. Reaching out to his passionate customers Wit Brewery quickly attracted thousands of investors each investing a few hundred to a few thousand dollars. This phenomenon attracted the likes of the Wall Street Journal which in turn attracted the SEC lawyers. Given Andrew’s background (he was a corporate lawyer prior to founding Wit Brewery) he was able to keep the SEC at bay and with the insight he gained from the public capital raising process he ultimately transitioned Wit Brewery into Wit Capital — an investment bank.
Yet, the core of what Andrew was trying to accomplish — allowing small investors with an interest or passion for a specific product to invest in small businesses looking to raise capital is still mostly a dream more then a decade later and one of the core reasons for this are the prohibitive securities laws mentioned above. Consider the following:
If I am software engineer making $130K/yr I can loan a deadbeat $10K to repay their $40K in credit card debt via Prosper yet I can’t efficiently (i.e. with a few clicks on a site) invest $10K in a former colleagues new technology venture (something I know a whole lot about) or a local frozen yogurt store looking to expand their stores in the region (again something I know a whole lot about because I see the lines out the door on a nightly basis from my apartment). Furthermore, small investors in these small businesses (unlike loan officers or American Express who are the usual sources of capital for small businesses) are willing and able to become product evangelists for these young companies.
I think its about time we revisit these securities laws.
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what is a twitter feed?
is investment in a yogurt store near you worth exploring?
Comment by mil — September 13, 2008 #