Can angel funding be "crowd" sourced?

[pclark]

I'd like to raise ~$100K of funding for my company (we're working on news algorithms, hoping for patents and such), and I was wondering if there were any legal issues with offering x% of my company and then offering people the chance to buy small stakes? for example (and i'm doing these sums off the cuff) offer 20% of my company for $100K.

I'd offer investment in the form of ~$250 installments and that'd grant the purchaser the tiny stake of the company, and various collaborative "where the app is going/where it should go" democratic options.

Is it allowed? Has there been any discussions on this form of investment?

It seems like a really great way to get a) a good crowd of dedicated users! b) easy to raise future funding, c) good for end users to have a small investment in the web world.

[skmurphy]

It's illegal to even make the offer in the US unless your investors are "qualified" (an SEC definition covering net worth and income that is a proxy for their risk capacity). Employees are considered insiders and exempt from the "qualified investor" requirement. Read up on the Securities Exchange Act of 1933 (e.g. http://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1933 ).

[byrneseyeview]

This is what it means to sell stock. Instead of "installments that'd grant the purchaser the tiny stake", say "shares". Instead of democratic options, let shareholders elect a board of directors. The main issue is that, in the US, the SEC regulates who you can sell to, what you can say to them, etc.; and forces you to give up regular, audited financial statements after a while.

[wmf]

This was discussed yesterday, actually: http://news.ycombinator.com/item?id=372091

And many times before that: http://searchyc.com/SEC+regulation?sort=by_date

[sdurkin]

My current project is a sort of microfinance site that does exactly what you're describing. I recently pitched it at a pitch competition (lost.) Long story short, there are some legal obstacles, but nothing insurmountable. If you want to hear more, feel free to email me.

[webwright → sdurkin]

Seriously, if you think there are "some legal obstacles, but nothing insurmountable", you'll want to investigate further.

If you sell equity in your company, you REALLY don't want to sell it to non-accredited investors... It's hugely more expensive from a legal POV. Read:

http://www.thestartuplawyer.com/securities/life-is-too-short...

While you can sell equity to up to 35 non-accredited investors, you shouldn't-- here are the reason he throws out:

"(1) Non-Accredited Investors Trigger a Larger Disclosure of Information - If you raise capital from non-accredited investors in a Rule 505 or Rule 506 registration-exempted financing, you must provide a huge amount of information about your startup company. Think IPO-registration huge, thereby leading to larger legal and accounting costs. Such additional costs may not be prudent if your startup company is tight on capital.

(2) Non-Accredited Investors Tend to be More Hostile Than Accredited Investors - Implied by the definition of a non-accredited investor, the investment a non-accredited investor makes to your startup company will mean much more to him or her than an investment an accredited investor makes. A non-accredited investor will be much more emotional. Thus, non-accredited investors are much more likely to sue your company if things don’t go according to plan.

(3) Non-Accredited Investors can Hinder an Acquisition - It may be difficult for your startup company to be acquired after it has completed a registration-exempted financing with non-accredited investors. Non-accredited investors trigger additional rules in the context of an acquisition (e.g., a purchaser’s representative). Sometimes the acquiring entity will require a startup company to perform a buyout the non-accredited investors pre-acquisition."

[sdurkin → webwright]

No, we're not by any means thinking of selling equity to non-accredited investors directly.

Perhaps "some legal obstacles" was not the best phrase to use. There are significant legal obstacles, and we're consulting with a corporate lawyer from the U. Chicago who has agreed to do some preliminary work pro bono.

Everything is in the early stages, and with corporate law the line between what's considered innovation and what's considered fraud is murky. Without annoying my partners by saying too much, we're confident we have a type of solution.

[webwright → sdurkin]

I'd wager that if there was innovation to be done, we would've heard about it by now. If you do it, make sure you get a lawyer who specializes in securities law (a generic corporate lawyer is not your best bet).

Seems like a lot of effort (and a TON of expense) for something that most securities lawyers would tell you is a bad idea...

[pclark → sdurkin]

very interested! wanna drop me an email (cant find yours) -- peter@omgponi [dot] es

[aupajo → pclark]

That is quite possibly the best domain name ever.

[pclark → aupajo]

thanks :)

[vaksel]

based on that facebook story yesterday, once you hit 500 investors, you pretty much get considered a public company, with all the extra strings attached.

Why don't you try finding angels to invest? If you are working on algos that can be patented you should have no trouble finding investors.

And if you are looking to raise 100K, and can't find any big time investors, you can always get some credit cards to eat the cost. Surely you get plenty of those offers from capital one etc for 30K @ 0% apr til Nov 2009. Granted you have to be pretty sure of your idea to go into debt, but nothing ventured, nothing gained.

And if credit cards don't work for you, you can always try raising the cash using those micro loans services.