Unregulated Crowdfunding

Two years ago Congress passed the JOBS Act, promising to help small businesses and startups more easily raise capital by loosening various Securities and Exchange Commission (SEC) regulations. Two years later, it’s as hard as ever to raise equity capital and if you aren’t rich (accredited or qualified investor status), you can’t legally participate in the world of startup investing. The reason for this is that the SEC implemented the JOBS Act the way they wanted to, and in the process hamstrung its use.

As one might suspect, the world of technology is likely to solve this problem on its own. As Naval writes in this excellent post, the innovations behind the Bitcoin protocol and architecture are spilling out into the world of open source and crowdfunding. We have seen a number of exciting projects lately that are loosely organized collections of software developers building new approaches to distributed e-commerce, identity, legal contracts, and a host of other interesting and vexing problems using this method to fund their “startup” (cut and pasted from Naval’s post):

• Write software to power a completely distributed network in which any node can participate anonymously.
• Allocate scarce resources in the network using a scarce token – an Appcoin. Users need this Appcoin to use the network. Owners of scarce resources get paid in Appcoins.
• Pre-mine or early-mine Appcoins and keep some non-threatening amount. These are shares of your company, equity that will appreciate in value if the network is adopted.
• Give network operators the ability to collect new Appcoins in proportion to their contribution. Route a small fraction of each transaction output to the developer foundation (Mastercoin does this). Theserevenues are used to pay for operations, and bounties for ongoing development.
• As network usage increases, so does equity value and revenue.
• Anyone can buy Appcoins, anywhere, anytime, anonymously. Ship your code, ring the IPO bell.

We’ve been asking ourselves at USV if we should be purchasing coins in some of these “genesis block sales” instead of our normal appetite for Series Seed and Series A shares. I think the answer is ultimately yes, but we are most certainly entering into unknown territory in the process.

My partner Albert has been predicting that there will be no distinction between the public and private markets in a decade. He may have been off by eight or nine years in that prediction. It feels like its coming soon and coming fast. And that is exciting to me. Anything that creates more innovation and more entrepreneurs is a good thing for VC, for society, and for me.