[Transcript] With Recent Passage of Regulation A of the JOBS Act, startups can raise up to $50m from the public… Where is this heading @jason? #AskJason

For those of you that know me well, you know I love ThisWeekInStartups with Jason Calacanis.  He’s one of the industry’s best interviewers and his podcasts are always engaging.

A couple weeks back I was invited to submit an #AskJason question where I could ask him any question regarding startups or angel investing. For my first question I decided to ask about the macro trends of startup investing and where he sees the market heading over the next 5 to 10 years.

Below is an embedded tweet of the Q&A as well as a transcription of the video. I figured it would be great to have the video response be typed up so that people can read in more detail if they wish. Also, admittedly, the SEO in me knows that content is king. 😉

Hope you enjoy the video!


Benjamin: Hey, Jason. With the recent passage of Regulation A of the Jobs Act, startups can now raise up to $50 million in the open market. Add to this the proliferation of startup equity funding websites like Angel List and Angel List syndicates, such as yourself. Both of these, compounded with the skyrocketing late stage startup valuations, has gotten the public really excited about startup investing. Where do you see this trend heading?

For example, do you see this startup investing going the mainstream that financial advisers are actually recommending startups as an alternative asset class to their clients? Or do you think this is just a trend, it will hit a ceiling at one point and drop off from there? I’m curious to hear where you see the next 5 to 10 years unfolding.

Jason: Okay, okay. This is a great question. For those of you who don’t know, there are two classes of investors here in the United States. One is called an accredited investor, and one is called a non-accredited investor. My history may not be perfect, but essentially what the SEC did, the Securities and Exchange Commission, is they said, “We have to protect people.” We call them in our industry, or I call them, civilians. These are people who don’t have money to lose. They’re not rich, in other words. They’re non-accredited investors.

And so the SEC said, “Hey, these civilians, these non-accredited investors, we’ve got to protect them. We’ve got to protect them. We can’t have them out there buying shares in mines in California thinking they’re going to hit gold during the Gold Rush because somebody’s running around to a retirement home in the ’30s and ’40s getting people to give over their life savings thinking they’re going to 10x or 100x because they’re going to strike oil or gold.”

So that’s the history of these regulations. Of course, they’re antiquated, and people don’t need as much protection today. And we want to have a fluidity in the market. So when there was 15, 20% unemployment in our country during the financial crisis, there was a lot of people who were like, “Hey, we need to create more jobs; we need to loosen up the fundraising of startups because a lot of jobs come from startups.” This is all great.

Now, what does it mean in practice? What it means in practice is you used to not be able to do something called solicitation, which is tell everybody you are raising a fund. Because if you do general solicitation, in other words, you just get up on stage somewhere and say, “Hey, I’m raising money. Give me your money,” now you’ve triggered, in the SEC’s mind, and you should talk to all your lawyers, etc., etc., etc., disclaimer. But you basically trigger in the SEC’s mind that you’re generally soliciting and that those people need some sort of extra protection against people running scams, Ponzi schemes, etc., etc.

So with the regulation’s passing, we now have a couple of different categories of fundraising. One is called crowdfunding, and that is Kickstarter, Indiegogo, and Tilt. And what happens on a crowdfunding site is you want to see a new product in the world like the Pebble watch, we had a great episode for Pebble on this week in startups, and you give money and you get a t-shirt or you get the watch itself. It’s basically pre-ordering. You don’t get equity in the company that makes Pebble.

In other words, you might be buying the Apple Watch, but you’re not getting a share of Apple. And that’s fine. That’s just like pre-ordering a product, no big deal. You bought tickets to a concert that did not net a car. You don’t need any protection from the SEC. But once you buy a share of the company, when you start investing in shares of the company, that’s when the SEC gets involved.

So then there was Angel List. Angel List allowed a syndicate, a group of investors, to invest in a company. But it was only accredited investors, right. The accredited investors … and this started just over a year ago and, of course, people know I have one of the largest and most active Angel List syndicates along with Tim Ferris and Gil Penchina and Dave Morin and a couple of other great people, and those are all accredited people. So there’s 700 people who are accredited investors. That means they have a net worth of a couple million bucks. They can afford to lose $5,000 in a startup easily.

The latest wrinkle in the story is that non-accredited investors which, because of this act called the Startup Act, they are now able to invest in equity. My view on it is, listen, if you can go bet on the Knicks to win the championship next year, that’s a pretty good long shot, isn’t it, in Vegas, why shouldn’t you be able to invest in a startup? So I’m pretty pro people being able to do what they want with their money. I’m a Libertarian.

And then if people commit crimes, those people go to jail, those people can get sued. I think there is a system for that. But I have to say that when I saw the first equity crowdfunding projects for non-accredited investors launch recently, in the summer of 2015 this all became okay, it felt like a bit of a scam to me. It felt a little icky.

And the reason is the companies that are great can raise money from accredited investors. They don’t need to dip down into this audience. So there is something called negative signaling that occurs. If you try to raise money from non-professional investors, maybe you’re not a professional CEO. And it’s just a little bit too much salesmanship and P. T. Barnum for me and my tastes.

When I give a syndicate, when I tell my syndicate I’m angel investing in a company, I say, “Hey, I’m putting 50K into this company,” the angel list syndicate, then, they get to make a decision. But I don’t force them, and I don’t try to sell them hard. “Oh, my God, this is the next Uber; oh, my God, this is the next Facebook; oh, my God, this is the next Thumb Tack.” No, I just say, “I’m investing, you’re in my syndicate. If you’d like to join along, feel free.”

So I have a little bit of concern about this, but I also think it’s a tremendous opportunity. At some point, somebody with a love product, like Reddit, let’s say, could raise $50 million from their users. Or I could save for the launch festival and launch. Hey, I want to raise $10 million, and I want to take the launch festival to 10 different cities. Anybody who wants to, I’m going to get 100,000 people to put $100 in each, and boom. Or 10,000 people to put in $1,000 each and raise $10 million to take launch festival on the road. And instead of just selling you a ticket, I am selling you a share in the company.

So I think it’s got great potential. We’re going to have a lot of issues around it. And so I think that the syndicate project and Angel List, great. The Kickstarter, great. I’m a little bit concerned, frankly, about non-accredited investors because of the poor companies and also because the platforms that are supporting it, I’m a little bit suspect of because they’re doing too much marketing. I wish they wouldn’t be marketing so hard.

Great question.

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