Twitter: A micro-financing vehicle?

Jason Goldberg, founder of aggregation service Socialmedian — and the controversial former CEO of Jobster — set off a bit of a hand grenade via Twitter today, when he posted a message saying that his company was looking to raise some money. The full text of his message (which he later deleted, but which is still available on FriendFeed) was:

“socialmedian is raising some more angel investment now. $25k-$100/investor, up to $500k. Interested parties can contact me directly.”

Within minutes, the eagle-eyed Michael Arrington — a former securities lawyer specializing in IPOs, and therefore intimately familiar with the rules — had put up a post on TechCrunch about the message, saying Goldberg was effectively soliciting investment without filing a registration statement and issuing a prospectus, something that is prohibited by the Securities Act (specifically, Section 5). As Mike points out:

“Most venture financings are excluded from Securities Act registration via a private offering exemption. But the key to these exemptions are that they aren’t disclosed publicly and the investors must all be high net-worth individuals. In other words, this is exactly the kind of offering the law is designed to stop in order to protect individuals.”

It’s interesting to read through some of the comments the Twitter message sparked on FriendFeed (there’s also a post about it on Mashable and Portfolio magazine has picked it up as well). Jason says that he was simply letting users know that a financing was coming, and that anyone taking part would still have to qualify (show that they were high net-worth and/or understood the risks, etc.) before investing. Others — including Goldberg — toss around the idea of using Twitter or a similar tool to raise micro-financings.

It was that last part that got me thinking. Why couldn’t someone “crowd-source” a financing for a startup? Why not amend the Securities Act to allow posts like Goldberg’s? The SEC has said that blogs can be used for Regulation FD disclosure — why not allow blogs and social networks to play a part in the raising of money? It’s not as though millions of people haven’t been just as impoverished by “qualified” investments and prospectuses as they could ever be by investing in a Twitter financing. Why do we need the government protecting us from ourselves?

13 thoughts on “Twitter: A micro-financing vehicle?

  1. Pingback: The 12-Hour Incubation of a Crowdsource Investment Idea at Media Transparent

  2. Pingback: SitePoint Blogs » Money of the Crowds: Crowdsourced Funding

  3. Interesting idea Mathew. I don't really think the legislation can be changed so easily but it's not impossible for a special product to be launched to address this particular issue and allow for micro-financing via social networks within the limits of the existing legislation.

  4. Re: “Why couldn’t someone “crowd-source” a financing for a startup?”

    I think the barrier is more human than anything, although it sounds like there are legal hurdles as well. Crowdsourced financing would create 2 problems:
    1. The company would likely have a huge number of relationships with investors to update and manage. That sounds hard.
    2. It's pretty hard to establish 'money trust' (high level trust that must endure difficulties over a number of years) through a web page, twitter message, etc.

    That's my perspective, as the CEO of a startup company (AdHack) that just launched our beta and is now preparing to go to the market to raise funding. I've played with the idea of crowdsourcing and it just doesn't feel right.

  5. Hey Mathew – I saw this string at TechCrunch yesterday and thought of wading in to illuminate the issue as it relates to “social lending” in general but thought the US nature of the discussion wasn't relevant. Now that you have has brought the issue home though, I'll wade in. At CommunityLend, we know this issue PARTICULARLY well as it is one of the central defining issues in launching a social lending service in Canada. Rest assured, there are ways of still using social networks for collecting people around financial requests that stays within the heavy constraints of Canadian law (as we will demonstrate in our planned launch in the next couple of months) – it's just VERY complicated. I take it we can count on you as an early user. : )

  6. The system and the GOV is there to protect the special interest, not individuals as the GOV and the SEC and FINRA have claimed.

    If Jason is allow to do what he proposed to do, all the institutions, VC, IB would be out of business. Also, there would be no need for the GOV grant system too because it takes the GOV FOREVER to hand out grants to business in need. Plus, business financing is not mean for everyone or all the banks would be out of business too.

    I agreed that SEC and FINRA should make such changes and allow non-accredited investors to decide for ourselves on “micro investments” without all the GOV scrutiny and red tapes.

    Of course, there are ways to go around the SEC because Jason's post on twitter only violated two areas.

    1) advertise in public

    2) Without qualifying investors

    Thus, Jason can very well host an online seminar without accepting investment money and to build “existing relationship with potential investors, FIRST. By doing so. Jason is relieved of its first violation of advertising in public.

    Also, its not difficult to find 5000 accredited investors online, as we have over 25 million accredited investors in the US alone. So 5000 isn't too difficult.

    Also, if Jason change his post a bit by stating below:

    Seeking individual/ private lenders! $100/ Lender rather than investor.

    Then, Jason should be on his way to achieve his objective.

    We believed in Investment Money From Majority For Majority (IMFM2)

    Good luck Jason

  7. The system and the GOV is there to protect the special interest, not individuals as the GOV and the SEC and FINRA have claimed.

    If Jason is allow to do what he proposed to do, all the institutions, VC, IB would be out of business. Also, there would be no need for the GOV grant system too because it takes the GOV FOREVER to hand out grants to business in need. Plus, business financing is not mean for everyone or all the banks would be out of business too.

    I agreed that SEC and FINRA should make such changes and allow non-accredited investors to decide for ourselves on “micro investments” without all the GOV scrutiny and red tapes.

    Of course, there are ways to go around the SEC because Jason's post on twitter only violated two areas.

    1) advertise in public

    2) Without qualifying investors

    Thus, Jason can very well host an online seminar without accepting investment money and to build “existing relationship with potential investors, FIRST. By doing so. Jason is relieved of its first violation of advertising in public.

    Also, its not difficult to find 5000 accredited investors online, as we have over 25 million accredited investors in the US alone. So 5000 isn't too difficult.

    Also, if Jason change his post a bit by stating below:

    Seeking individual/ private lenders! $100/ Lender rather than investor.

    Then, Jason should be on his way to achieve his objective.

    We believed in Investment Money From Majority For Majority (IMFM2)

    Good luck Jason

  8. Pingback: Crowd Sourcing Log » Money of the Crowds: Crowdsourced Funding

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