Walter Frick caused a stir in the tech community on Monday. Frick, senior associate editor of the Harvard Business Review, wrote a story that warned people not to get too ahead of themselves about new, looser rules around startup investment.
It used to be that people earning more than $200,000 per year were the only ones allowed to take equity stakes in private companies seeking funding. These people are known as “accredited investors.” The new rules freeing this regulation were signed into law by President Obama in 2012, but SEC concerns delayed its implementation until this week.
Now anyone, not just the wealthy, can invest up to $2,000 per year in non-publicly traded companies. In return, investors can receive a stake in the business, with companies being allowed to earn up to $1 million through this new means. With what crowdfunding sites like Kickstarter have done for tech startups of recent years, these rules seem poised to welcome in a new wave of strong tech startups. Or do they?
Frick tells Inverse how today’s popular crowfunding sites relate to these new relaxed regulations.
Is there more of a risk involved than, say, if the investment was done through Kickstarter?
With Kickstarter, there might be some risk that the product won’t come through as promised, but for a lot of the projects you’re just giving to support something and not thinking of it as an investment. When people donate to a recording artist, they probably aren’t using the money that they are saving for retirement. With equity crowdfunding, people could be investing money that they potentially are depending on.
Do you think this may be perceived as riskier than going through something like Kickstarter? It seems like the relaxing of these regulations is building on the success of sites like it.
The thing that makes them different is the idea of big upside or payoff. A lot of the excitement around equity crowdfunding came from this idea that you might “find the next Facebook” and make tons of money, but for a variety of reasons that’s really probably unrealistic.
You mention the bigger issue in creating startups is less with the initial funding part but with scaling these new ideas. Wouldn’t crowdfunding help to scale these ideas?
It’s not totally clear why U.S. startups are having more trouble scaling, though that’s what the data suggests. But the amounts you’re allowed to raise from equity crowdfunding are too modest to fuel the scaling of a multi-billion dollar company. So even if funding is part of the scaling problem, crowdfunding won’t do much to change that.
Will this new plan mean more entrepreneurs persuaded into trying to start a new business?
It’s totally possible we’ll see more entrepreneurs and small businesses, which is great. I think it’s less likely that we’ll see too many more high-growth startups that reach a large scale.
This interview has been edited for brevity and clarity.