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When Kickstarters Fail

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40hz:
I guess I'm more of the "in for a penny, in for a pound" school of thought when it comes to things like this. And from some of the noise I'm hearing, so is the SEC.

Of course it also begs the question of why Kickstarter makes finding failure stats so difficult for projects hosted on their site. I think the answer is fairly easy to figure out. Which is why I took care to characterize their behavior as "disingenuous" rather than "dishonest" earlier.

But there is proposed legislation that may soon have a significant bearing on crowdsourced funding projects. Here's one legal opinion on it.

It's long
<Link to original page here.>

Kickstarter, to date, has been operating based on the general belief that contributors are not purchasing securities (i.e. a profit interest in any of the companies in which they contribute funds) under the current methods used to raise funds on Kickstarter and similar funding sites. These fund sourcing sites do not purport to be an intermediary for a company's offer and sale of its securities, but instead companies only agree to provide contributors with something of value, in consideration for their contributions - in this case a Pebble wristwatch. Based on the assumption that such transactions do not constitute investments in securities, it does not appear to be regulated under U.S. securities laws.

Now that new crowdfunding laws are scheduled to go into effect sometime within the next 245 days, crowd sourcing sites like Kickstarter will need to be more aware of the methods used to raise funds on their sites to assure that they are not subject to regulation under the crowdfunding laws, or, if necessary, that the sites are properly registered and all transactions are conducted in compliance with applicable crowdfunding laws.

Interestingly, even though the article was written after the JOBS Act was signed into law by the President, there is no mention, in the article, of these new crowdfunding provisions. It is possible that the author of the article, as well as Kickstarter and similar crowd sourcing sites, are not yet convinced that crowdfunding, as provided under the provisions of the JOBS Act, will become a viable means of raising capital. For starters, it limits the total amount a company can raise during any 12-month period to $1 million, which is $6 million less than the amount of funds raised by the watch company through Kickstarter.

Also, if the digital watch company - Pebble - had been able to raise $1 million pursuant to the equity crowdfunding laws included in the JOBS Act, at the time these funds were raised, it would have been required to have audited financial statements and also be required to make certain disclosures to the SEC. Finally, Kickstarter, or any other funding portal through which the funds were raised, would be required to register with the SEC. It appears that those with an interest in providing services as funding portals under the new crowdfunding laws, including existing crowd sourcing sites like Kickstarter, are going to wait for a final determination of the registration requirements, before making any decisions on whether to register with the SEC as a funding portal.

I'm not crazy about regulations. And I think the government is more than a little behind the times when it comes to much in the modern global economy. But in this particular case, I can see why they are concerned. And there are governing laws for this sort of thing. You can't just put something together to do an end run around them and expect nothing to happen. You're bound by the law whether you agree with it or not. Much like Copyleft and Creative Commons. Those who originally put those together intended for them to be alternatives to a standard copyright. "Not so!" said Uncle Sam. You have a legal copyright whether you want one or not. If it amuses you to also do a CC on some creative work you've done, that's all well and good. But it supplements a standard copyright. It does not act as an "alternative" or "replacement" for one. You always have copyright protection. There is no provision in the law that allows you to waive it.
 8)

wraith808:
But in this particular case, I can see why they are concerned. And there are governing laws for this sort of thing. You can't just put something together to do an end run around them and expect nothing to happen.
-40hz (November 02, 2012, 05:06 PM)
--- End quote ---

I'd have to disagree on this point.  And I think they're being disingenuous, truthfully.  They only reason that they're concerned is because of the volume.  The same sort of thing has been done before, it's just not been (as) successful, other than (arguably) in the case of charities.  And for the level of individual 'investment', and the fact that they are decidedly not dealing with a monetary concern, they should be more concerned for Wall Street than Kickstarter (and they're talking about repealing those if Romney gets into office as they are 'too constricting').

40hz:
They only reason that they're concerned is because of the volume.
-wraith808 (November 02, 2012, 05:46 PM)
--- End quote ---

That's the only reason we're concerned about anything really. Below a certain "noise level" nothing is ever much of a big deal.

But hardly disingenuous. I think this is more an act of recognition than a desire to regulate. It's an acknowledgement that crowdfunding may indeed be the next big thing in business or project financing. So there's the potential for large amounts of money to change hands with a fair degree of regularity if it really takes off. And I think most of the legislation I'm seeing proposed is intended to be proactive. I don't see some big conspiracy with Wall Street and big banking looking for ways to torpedo something like Kickstarter. They would love to see informal off-book arrangements like this become the norm. Because they want to be out from under regulation more than the most rabid libertarian ever did. It's not about principle either. Regulation is costing financiers money as well as denying them the "flexibility" to run roughshod over good business practices.

If Kickstarter really takes off, the VC world willl just copy it - or buy it outright. There's nothing that's remotely proprietary in Kickstarter's non-business model, so there's no IP to get around.

No. I don't have a problem with some thought being given to oversight when it comes to crowdfunding. I know too much about how business gets done, and how aggressive business finance can be to ever trust it to self-regulate. Because even with regulations in place they constantly push the boundaries of the rules. And the current state of our domestic economy bears mute testimony (and some scars) to what the lack of enforceable financial regulation can result in.

I'm all for laissez-faire capitalism. But not to the point of where I'm willing to give businesses carte blanche to do whatever they want. We already tried doing that. It doesn't work.

alexsan01:
I wonder why Kickstarter does not implement a way o rate the project team. People who has funded their project could rate the level of communication the team developing the product has with their funder, how often the update with new information. I don't know, just a why to tell other potential funders if is good or not to fund this project. I know there's always a risk of failure even with this information but funders have to understand that they need to keep people updated.

SeraphimLabs:
You guys might know this actually:

I have a project that's been in R&D at my own expense for the past 4 years or so, that is drawing near to the point where it is ready to patent.

It is developing a mechanical device- an engine like no other, and already has a prototype that demonstrates a successful concept even going as far as filling the testing area with the blue haze of the lubricating oil burning in the chamber because the test type lacks oil control.

Would Kickstarter be a suitable way to secure the funding for said project? I really need to fix some glaring errors in the design and construct an improved prototype, but also lack the money required to secure a patent on the design let alone promote any viable products to come from it.

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