These Guys Built a Crowd Investing Platform Even Though It’s Not Legal Yet

From the makers of Startup Workaway comes WeFunder, a Kickstarter for startups. Trouble is, Congress hasn't yet approved the law that makes amateur investing legal.
kickstarter girl walk crowd e1328015568109 These Guys Built a Crowd Investing Platform Even Though Its Not Legal Yet

A crowded Kickstarter party. See what we did there?

It is illegal to invest $100 in a startup in exchange for equity or options unless you’re an accredited investor.

Still, a website for crowd investing launched today: WeFunder.com. Even though the law that would make it legal is still being debated in the Senate, TechStars alumni and Startup Workaway co-founders Nicholas Tommarello and Nick Plante went ahead and built WeFunder and wrote a business plan anyway.

“We’ve built out the crowd-investing platform in advance of the law passing, and have put in a lot of thought into how to best protect small investors,” Mr. Tommarello wrote in an email.

A disclaimer on the site reads:

Wefunder is a crowd-investing platform for startups. Until the current law is changed (hopefully soon!), our invite-only beta is only open to accredited investors.

“We’re only going to choose one startup a week to feature; artificial scarcity will drive up quality,” Mr. Tommarello said. “And we will only choose startups with at least one accredited investor – the idea is that angels perform due diligence and professional mentorship, the crowd can throw in up to $1 million afterwards. That delays the date an A round is needed, enhancing founder control.”

Clever. But even though the House of Representatives version of the Democratizing Access to Capital Act (S.1791) passed in a bipartisan landslide, 407-18, it’s unsure whether the Senate will give the OK. The bill was introduced by Tea Partier Scott Brown of Massachussetts. “When we talked to Scott Brown’s team, they were optimistic their bill would pass,” Mr. Tommarello said. “However, we’re told that there is some skepticism that small investors actually want to do this, and that the dollar amounts invested would be high enough to actually help the economy. Which is bullshit, since nearly $100 million was spent on Kickstarter in the last year… for mostly art projects.

“It’s pretty absurd that politicians are happy to use crowd-funding to finance their campaigns, but don’t realize the same dynamic works for job-creation,” he said.

Laws prohibiting non-accredited investors from purchasing stock in startups were put on the books to protect the dull and the gullible — like little old ladies in New York and Baltimore who were swindled into buying worthless plots of land a smarmy door-to-door salesman said might have oil. Considering millions of people were recently sold mortgages they couldn’t afford, the need for consumer protection seems real.

But beyond the consumer protection argument and beyond the economic argument, opponents of crowd investing say it’s bad for startups. Startups don’t need a vast pool of undereducated micro-investors, the argument goes, they need savvy investors who know the market.

Considering how many startups raise their first rounds from friends and family, this argument may be moot. But WeFunder’s requirement that a startup have one accredited investor before signing up for the platform guarantees a modicum of due diligence.

You can’t invest in startups on WeFunder yet, but you can sign a petition to send to the Senate.

But before you do, realize that if the law passes, at least one consequence seems certain: there will be more startups. Do you really want that?

Follow Adrianne Jeffries on Twitter or via RSS. ajeffries@observer.com

Comments

  1. Adam says:

    We need to continue to push for reform in the investing arena.  And this is as good as a platform to experiment with as any.  I look forward to watching the story unfold.

  2. Opuler says:

    there’s quite a few sites popping up lately that are building and hoping laws change

  3. Jarryd says:

    Great story, and an interesting concept!  This is pretty exciting for those who
    are already accredited investors looking to make small investments in multiple
    startups… WeFunder is basically sieving out quality
    startup opportunities with angel investors already in place and pitching for
    your participation.  But it sounds like you forgo the control that comes
    with a larger individual investment, as well as those juicy preferred dividends
    that come with many Series A investments (great news for the startup though!!).

    Let’s hope those investors who are newly empowered by any legal revisions don’t
    bite off more than they can chew; the bar is arguably set pretty low when
    considering high-risk investments
    (http://www.sec.gov/answers/accred.htm).  But I definitely understand the need to question, “Why is there a bar at all?”  Scrutiny of consumer protection/risk controls is so intense across the investment community that if the law is revised, platforms
    like WeFunder may live and die by their controls and ability to educate their
    investors.

    1. Anonymous says:

      link is 

      http://www.sec.gov/answers/accred.htm

      I actually did not know that this

      a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or 

      qualifies you as an investor! Thought you had to be worth $1 m.