Looks like there is a significant possibility of Congress passing new legislation that will make it easier for startups to raise seed capital. This would supposedly let a company raise up to $2 million from a large number of investors – and by investors, I don’t just mean accredited investors (the high net worth people who are currently restricted into making large private investments.)
This is both cool and scary.
Of course the part of me that likes seeing new companies have the capital to give it a shot loves this bill!
The side of me that watches American Greed is totally freaked out at how scam artists will use the bill to defraud grandma.
But I think there is a solution that can help out at least a little bit.
If the funds have to be raised through a registered, regulated institution like SecondMarket then there is a chance that some of the most basic fraud can be avoided. For example, if a private secondary marketplace can confirm that the people raising the money are 1) who the say they are and 2) actually own the company in question, then two of the more common frauds (that I can imagine) might be avoided.
I’m not saying this will alleviate all of the potential fraudsters, but at least there won’t be people tricking grandma into believing that they are Zuck or that they are offering an exclusive chance to own pre-IPO shares in some company that’s already public.
I realize that the secondary markets will need to collect a fee to provide this service, but they also will add significant value beyond vetting the “legitimacy” of the startup – they will also provide buyers/liquidity. This is a pretty big deal.
