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Comment by Brushfire | Hacker News Reader

I'm with you. This seems like it would be better classified as 'Awesome' than 'Scary.

The more money and avenues available for owners to have available, the better. VC is not going to be eliminated by microlending, and anyone who thinks so is crazy. VC is 90% about the expertise/network, and 10% about the money. Microlending is 100% about the money. Both are valid in different situations.

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You're half right on that. I probably should use the word "unbelievable." It's either a good thing or bad thing. We can freely give to others in third world countries; however, current SEC Reg D rules that we cannot invest in companies that are struggling down the street. We must be accredited.

While it's good, it can also be viewed as a bad thing.

Forgive me, but I still dont get why its a bad thing.

From your comment, it sounds more like you believe the 'accredited investor' rules are bad. These are pretty readily bypassable if you know how, but how does that relate to the quantity of microlending -- becuase potentially only a few can participate? I'm not trying to be argumentative, just understand your point of view. I see no downsides.

Sorry, but what are the easy ways to bypass rule 501? If it was easy to bypass, wouldn't a lot of startups be offering shares?

Sorry for delay.

From what I understand (I am not a lawyer), you can bypass 501 if the investors LLC-ify themselves and are active members in their own LLC before investing.

Startups cant do this, becuase its not on their end, its on the investors end. And most investors dont want to deal with all of this hassle.

But the main point is, I dont believe you have to Qualify 501 for organizations who invest in yours, only individuals. Hence the bypass.

All that said, Ive never actually done this, so who knows.

No, that's not correct. An LLC is qualified to invest only if it has $5MM in assets, or if all the principals of the LLC are themselves accredited.

Interesting.

I still think you can get around this with active vs passive. I personally have had investors use LLC's who have less than $5mm in assets, but we set them as an active investor. This was done by an attorney with expertise in the area.

The risk here is that if you screw anything up, you taint the company that issued the stock in ways that make it hard to get investment in the future, and that expose it to legal threats. I'd love to hear more about how you pulled this off, but my real point is, there's no "cut-and-dry" way to invest safely in a small private company through an LLC.

The only downsides I see are from the venture capital perspective. I view microlending as being a form of investment that can actually work--that people will actually pump money into. I see this as an upside for microlending; however it's a bad thing for our economy and venture capital because it's an indication that we're lending to others, but not allowed to EASILY invest without being accredited.

I agree, but you're using this word "EASILY", and from what I can see it is basically "IMPOSSIBLE" for a startup to tap the pool of upper-middle-class professionals for investment capital, even though most startups and many professionals would be a good match for each other.

From my perspective, because usually I don't find many want-to-be angels who don't meet the qualifications and can supply the amount of funding I would be willing to deal with.

I'd rather deal with 3 people giving 200k than 30 people giving 20k. The downside of relaxing the accredited investor rule is the con artists will come out of the woodworks to get blind, senile grandma to invest in "amazing business opportunities". Personally, I think the rules are about right as they are. See above about LLC bypass if you really have a current need and can convince your non-accredited investors to go through the hassle.

See above, and then consider that if people could invest $500 in your startup, someone else could build a business creating a liquid market in startup equity, which you could then tap for funds in an arbitrary amount.

Yes, I've thought of this before.

But I'd rather deal with loans than equity if the equity doesnt also give expertise. The type of quick equity fund you describe would likely have to offer convertible debt (ie lending) or force the risk of being crammed down regularly. And without the expertise, there is no downside for the entrepreneur to screw these $500 investors out of their money regularly.

So if you are already lending (convertible debt->equity) then how is this different from microlending?

Regardless, I see your point about flexibility, I just personally cant see it as all that much more useful than microlending for either side.

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