Equity Crowdfunding

If you go on the CircleUp website today, you will find on its front page a solicitation for stock purchases in a new company called "bobbysue's nuts."

The company will make "delicious all natural mixed nuts" from the "founder's family recipe" and donate "a portion of proceeds to homeless animals."

(I am not including a picture of the proposed product, and I am not offering an opinion as to whether you should invest in the company.  I am just giving an example.  I do not want to get in trouble with the Securities and Exchange Commission, aka the SEC, a notoriously touchy agency.)

Anyway, if you think this sounds like a boffo idea for a company, you can buy stock in it, provided you meet one of the two conditions below:

     -- You have more than $1 million in net worth outside the value of your house, or

     --  You have had an annual income of more than $200,000 ($300,000 for couples) for several
          years and are likely to continue to have such an income.

Everybody else is SOL.

CircleUp is one of the new equity crowdfunding websites.  Others include Angels Den, EquityNet and CrowdCheck.  They seem to concentrate on raising money for consumer-products companies whose concepts can be explained to, well, consumers.

Most of the websites were formed after the passage of the JOBS (Jumpstart Our Business Startups) Act in April of 2012.  The idea -- at least one of the ideas -- was to allow lesser mortals to invest in interesting business concepts.

Crowdfunding sites evaluate promising ideas, company founders and financial projections before posting investment solicitations.  The sites also verify would-be investors' qualifications as "accredited investors."

The "accredited investor" definition is government language, a hurdle that people must meet to make certain kinds of investments, mostly in hedge funds and angel funds that provide startup equity for new businesses.  The idea is to protect people who are not financially sophisticated from being swindled or making stupid choices and going broke.

The JOBS Act was supposed to allow unaccredited investors more access to these investments, and the SEC was to issue regulations allowing this to happen. Now, almost two and one-half years later, the SEC still has not done so.  Some lawyers and venture fund leaders have made guesses at what the regulations will say, including the following:

     --  That the wealth or income requirements to qualify as an "accredited investor" will be raised.

     -- That unaccredited investors, i.e., everyone else, will be limited to putting $2,000 into any
         first stock purchases, with gradually increasing limits after that.

It's for our own good, of course.  The government is trying to protect us from our own feckless stupidity.

Two things about the whole business amuse me.

1.  First is the assumption that rich people are sophisticated investors.  Most of us know at least a few rich folks who aren't all that bright.  We also know smart people who don't have fortunes but who are reasonably financially sophisticated.

2.  Second is that the government, at least in most states, is hip-deep in the gambling business.  While normal people are not allowed to invest in companies that actually may turn a profit, the government is perfectly willing to let poor schmucks bet any amount of money on lottery tickets or at blackjack tables, which are the worst investments of all.