Changes in New Businesses and Investing Rules

In case you were not aware there are new Models of investing in businesses. These will change the way businesses are started and funded. This will create both opportunities and challenges for both investors and businesses.

The first change is the one that is already in existence. That is the presence of crowdfunding through Internet Sites like Kickstarter. These sites get past the need for accredited investors by inviting donations that are not going to receive ownership as compensation. The projects give donors some form of privileges. These vary based on the project. In this case, the investor/donor does not expect to get any monetary reward but instead some form of gift or social reward. Most money raises are much less than $1M and have been used for all manner of activity.

The second change is the new rules around more traditional investing. First the limits around being an accredited investor will be changed in 2014. This means lots more folks will be allowed to invest in start-ups. On top of that, these raises can now be public activities that can be advertised. Both of these changes will democratize the money as it is invested into new firms.

I think you can now imagine that this will put a lot of new companies out into the equity market. This should help create additional choices in the frothy market for where investors can put their money.

As a reminder, 90% of all new ventures fail and success is not predictable. I have known many promising companies that do not make it. Conversely, some ideas work for no apparent reason. This is why these rules were put in place - to keep uneducated investors from throwing their money away. If you are not comfortable reading financial documents or SEC filings, I question your reasoning in investing in start-ups. If you are willing to gamble on them, that is different.

On the other side, many companies will get funded that are not being built strictly to maximize the profit of the initial investors. As long as you are clear that the goals of your investment are being met, then have at it. But do remember that you are not likely to get your money back, much less make a return on your investment. Caveat Emptor!

On Monday, I will get back to the story of the Access Business inside of Tellabs.

Jim Sackman
FocalPoint Business Coaching
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