Those almost 10,000 early investors on Kickstarter participated in one of history’s most lucrative funding rounds from the perspective of the people receiving the funding: a $2.4 million early-stage investment in what would become a $2 billion business in a year and a half, in return for 0.0% equity.”

– WSJ’s Corporate Intelligence on Oculus’s crowdsourced 2012 fund-raiser.

 

 

Caveat Emptor, baby!

With Facebook acquiring virtual-reality company Oculus, one of the all time great sucker plays — the “Jumpstart Our Business Startups Act,” signed by President Barack Obama on April 1, 2012 — has been revealed as the massive bait-and-switch it is. (The JOBS Act? Hows that for a misleading title?)

It is relatively uncommon for the chairperson of the SEC to object to new deregulation, but when new laws are thought to be anti-investor, it’s no surprise. Regardless of strenuous objections, the JOBS Act became law, making it all-too-easy for companies to raise money. It was more of the same radical deregulation that helped cause the financial crisis. This was not about making markets work more smoothly, but rather, an extreme form of “smash & grab” capitalism.

Bill Black called it a “recipe for fraud.” But Professor Black was wrong — it’s not a fraud, it’s a scam. You see, fraud involves something where there is a violation of the law; no rules appear to have been broken here. This is how the JOBS Act is supposed to work: Let people make dumb decisions on their own, without any protection.

A scam on the other hand, is when people are legally duped out of their money. When the auto dealer offers you “rust-proofing,” it’s a scam. When a retail stockbroker offers you entry into a special purpose acquisition company, it’s a scam. Ordering something from a late-night infomercial — Order now, and get a 2nd one free, you just pay shipping & handling! — is a scam. These are legal ways to separate fools from their money.

Higher Stakes for Crowdfunding

What did the KickStarter funders of Oculus get? Note I use “funder” and not “investor,” because investors have a potential for an investment return. These funders, who backed the company three months after the JOBS Act passed, did not. As the Journal noted, they were promised “a sincere thank you from the Oculus team.” And, for $25, a T-shirt. For $300, the dangle of “an early developer kit” including a prototype headset. Total money raised: $2.4 million from 9,500 contributors.

Talking people out of $2.4 million in exchange for zero percent equity is a perfectly legal scam. Then selling the company for $2 billion dollars is simply how this particular crowdfunding works.

Perhaps there will be some embarrassing litigation from those people who feel duped. Pundits will throw their hands up over the JOBS Act (not that there is any evidence it has created jobs, but lets save that discussion for another day). Free-market absolutists will make tortured explanations explaining why dumb people got what they deserved. A few “Tsk tsks” and some “I told you so’s,” but that’s it. Ain’t no laws against stupidity. Well, actually there used to be, before the JOBS Act gutted them.

My regulatory philosophy is simple: You humans need protection from yourselves, especially when money is involved (and the SEC agrees). Sure, you can operate heavy machinery and do complex verb conjugations, but when it comes to understanding anything involving capital, you are often no better than a 2-year-old. And that is before the red fog of greed begins to cloud your minds.

In the case of Oculus, where you weren’t even promised equity, you simply revealed yourself as clueless naifs. What did you really expect to happen when you sell Democracy to the highest bidder?

Yay, crowdfunding!

The sheep have been shorn.

 

Originally published here.

Category: Investing, Really, really bad calls, Regulation, Venture Capital

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Attention Suckers: Send Us Your Money!”

  1. DeDude says:

    Exactly how did we get to the point where sociopaths are free to pray on other people as long as they don’t do it using a gun or knife?

    • Lyle says:

      It has always been the case that this is true, take Bernie Madoff who made off with his investors money, or any of a number of folks featured on American Greed. Or Ponzi himself. Or John Law and the Mississippi Bubble of 1720 in France, or the South Sea Bubble. Schemes to swindle folks are as old as the hills and gulliable folks fall for them.
      But then is a crowdfunded investment any worse than a “investment” in a Casino in Las Vegas? Call the crowd funded stuff gambling and its perhaps a better deal than Las Vegas as if you take the sum of the costs and returns from crowd funded operations there could even be a positive return.

    • Biffah Bacon says:

      It’s called deregulation. Ever since the Pure Food and Drug Act of 1907, evil anti-market forces have tried to restrain the galloping horse that is unfettered capitalism. How can you sell people your product if they are troubled by a label with a factual recounting of the ingredients contained in it? It was all downhill since the Bull Moose Party and only started back with Carter and then blossomed under Reagan.
      Now we can deregulate kidnapping, strong arm robbery, etc. with appropriate marketing language et voila!
      Leveraging the spot market value of a wealthy person’s offspring using clever apprehension and retention methodologies derived from synchronicities with executive branch agencies for an efficient kidnapping and subsequent exchange of offspring for financial considerations. What could go wrong?
      Why not sell financialized pieces of the kidnapped children in tranches that hedge against transaction failures? “I can get you a toe in 24 hours, Lebowski.”

  2. VennData says:

    The GOP loves names like the JOBS act. Remember their “Clean Air Act?”

    It should be called the INVESTOR EDUCATION ACT.

    Aww… GOP voter. Did I hurt your feelings?

    • BennyProfane says:

      The “Jobs” act had something behind it that is very very rare these days in Washington – almost unanimous bipartisan support. Obama could barely contain his glee as he signed it.
      I couldn’t believe what was going on. It was one go those moments when you realize that maybe those in Congress are probably right – that the masses who vote for them are horribly uninformed, or, simply, quite stupid.

  3. rd says:

    Proof that our markets are efficient with informed sophisticated investors driving the train:

    http://www.zerohedge.com/news/2014-03-26/sheer-idiocy-markets-one-chart-oculus-edition

    • VennData says:

      FB is desperate. They are dated fashion.

      That Wall Street got them billions in cash is the problem of the idiots who bought their IPO.

      P.S. Get you dog pics out of my news feed.

  4. magellan says:

    The idea of kickstarter as an ‘investment’ site is a red herring.

    No one in their right mind thinks of themselves as an investor when they back a kickstarter project. Project backers usually put up money in exchange for something. Perhaps it’s an early release of a product, a t-shirt, an invite to a product launch party, or just the satisfaction of being part of an effort that causes something get tried that otherwise wouldn’t have had a chance.

    Kickstarter backers are fans, advocates, enthusiasts, and often potential customers. They’re not investors.

    • You can cheer without “donating” money to a start up that eventually sells itself for $2b.

      • magellan says:

        Kickstarter doesn’t fund companies. It funds projects. The core idea behind kickstarter is that project ‘backers’ vote with their dollars to make something happen that wouldn’t otherwise happen. That could mean helping an indie band produce an album, funding and aspiring filmmaker tackle a controversial subject that mainstream studios won’t touch, or creating an interesting new product that VCs aren’t yet interested in.

        I’m a volunteer small business counselor at SCORE, an SBA financed nonprofit organization. Over the past several years, I’ve worked with a handful of small businesses that successfully funded projects using kickstarter. I’ve seen both the good and bad of kickstarter. It may not be perfect, but IMO it’s a great innovation in small business microfinance.

        For every billion dollar cash-out (is there more than one?), there are thousands of interesting and worthwhile projects that get funded by enthusiastic backers using mostly pocket change. That’s thousands of artists and small time entrepreneurs who get a chance to realize their dream who otherwise wouldn’t. And if a project falls flat and never gets completed, the backers just dust off and say oh well. Again, losses usually amount to the cost of a few cups of coffee.

        IMO, sites like kickstarter blend free market capitalism, free speech, and sometimes a little charity in a way that empowers average folks to do much more than just cheer. I hope you’ll take some time to dig past the sensational headline on this one. There’s more to see than what you’re seeing.

      • Mike.R says:

        I think you mistake the purpose of most of the people that “fund” these projects. Cheering while “donating” money to support those that invest time and effort into projects that you find meaningful and/or entertaining is far more rewarding than doing so with no skin in the game. Ten years ago that might been mailing a dollar to oddtodd.com, or buying a t-shirt or coffee cup from HomestarRunner.com. Today that might mean sending a fraction of a bitcoin over to the guys at thejuicemedia.com for their anti-war/climate change videos, or funding a kickstarter project for a rustic hipster to spread knowledge about the traditional techniques of pig butchery (http://vimeo.com/47809670). No different than sending a few bucks to PBS with the exception that someday, a very very small percentage of these “projects” could become $2B organizations, which doesn’t bother me a bit.

      • There is a huge difference between funding an artists or musician or even some quirky limited appeal gadget and a tech start up.

      • mileage says:

        But there was no attempt to deceive here and no evidence that people who ponied up the money didn’t get what they were promised. They weren’t promised speculative equity in a company; they were promised an Oculus device and they got one.

    • Lyle says:

      Perhaps promote it as gambling, after all the returns are no worse than Las Vegas or Atlantic City or …

  5. VennData says:

    On a highly related note

    ​Wall Street tries to jam single game app maker down investor’s throats.

    http://www.reuters.com/article/2014/03/26/us-kingdigital-ipo-idUSBREA2O1ZQ20140326

    If this is a sign that we are NOT at a top, i don’t know what is.

  6. SANETT says:

    From The Magnificent Seven: “If God didn’t want them to be shorn he wouldn’t have made them sheep.” Think I’ll try something similar, perhaps an empty gumball machine.

  7. BennyProfane says:

    I’ll have to admit this Kickstarter had me scratching my head. Do these people actually get a piece of the action, I thought? Well, now I know. It’s like upper middle class nerd begging. Only the beggar gets up off the sidewalk, dusts himself off and jumps in the back of a limo waiting for him. Bizarre.

    • LeftCoastIndependent says:

      It’s sort of like “Goodwill” for the middle class. It’s a feel good thing.

  8. jhawkins90 says:

    Barry, this is silly.

    It is equivalent to a early adopting Netflix subscriber being sore about not having invested in the stock.

    • There is a HUGE difference between purchasing an existing company’s products and effectively being the equivalent of an angel investor in a start up.

  9. btowers says:

    Barry, you’re way off the mark on this one.

    There is *no* equity involved in funding a kickstarter campaign. None. Zero. No ownership whatsoever. It has no connection with the JOBS act.

    Usually you’re just hoping to “pre-pay” for a product or service you would like to see exist.

    “You can cheer without ‘donating’ money to a start up that eventually sells itself for $2b.”

    Uh… right. Agreed. So?

    • Totally.

      I simply find it hilarious that was originalyl started as a way to support small prohjects — artists, film makers, gadget tinkers — eventually morphed into a zero equity venture funding.

  10. Liquidity Trader says:

    As it turns out, the Crowdfunders of this are none too happy about the buyout:

    “For many of Oculus VR’s early backers, news that the virtual reality start-up was selling to Facebook for $2 billion was a little like watching Bob Dylan star in a Super Bowl Chrysler commercial. The Southern California company got its start on Kickstarter, the crowdfunding site where enthusiastic virtual gamers helped it raise $2.4 million in exchange for a free developer’s kit or a T-shirt.

    Now some of those donors are crying “sellout.” They want their money back — and are happy to return the T-shirts.

    “I supported this because it’s something that I’ve wanted to see become a reality since I read my first William Gibson novel,” one Oculus donor wrote on Kickstarter. “Now I find out that I might as well have handed my money right to Facebook and I feel a little sick.”

    -Crowdfunders of the Maker of Oculus Rift Denounce a Facebook Buyout

    Angry, betrayed, cheated? But but but they got a T shirt!

    • jhawkins90 says:

      I think this is the much more interesting and relevant point. Not that these founders didn’t get any ROI (I think that talking in terms like these in this instance is actually somewhat vulgar) but that the company took a path that didn’t align with the vision of the original funders and that they weren’t comfortable with. These funders didn’t want money (perhaps this defines them as suckers – again, vulgar to my taste) but a revolutionary product, and now they have just another corporate entity. I’d be pissed, too.

      • DeDude says:

        Yes I might give what amounts to a charitable donation to someone for this kind of activity. However, I would first want to see a pledge that they would donate back at least 40% of any future profits to other Kickstarter projects.

  11. wtcombs says:

    For all those that said there was no free lunch…………

    Quite clearly, we all need to start using these “investors” to start our own businesses and eventually give nothing back.