Innovative selling models are constrained by the law
Springwise recently posted about a group buying site, this time from India, that actually has a new twist: real estate. This model is a good idea for tenant-in-common real estate deals, where you could sell a small commercial office building to 10 or 20 buyers who couldn’t afford the whole building or would appreciate the diversification. The US problem would be avoiding SEC regulation treating the offer and sale as one of securities rather than as a real estate deal (which is not regulated by securities laws). I recall reading that the SEC issued guidance on where it would draw an unofficial “safe harbor” line around TIC deals. I wonder whether having an offer available on a website would make the SEC think twice about swinging its general solicitation hammer down hard on an enterprising site.
Interesting to think about how the regulatory scheme, seemingly in the background, really affects the competitive landscape, much like Kickstarter is a nonstarter for startup crowdfunding in the angel/equity model. Crowdselling via kickstarter is what works well.
As an aside, does it make sense to complain about US securities laws? Maybe. Maybe they don’t do the investor protection job very well; that’s presumably a researchable problem. Maybe, of course, you remember that our laws are primarily designed to create disclosure, not safety. Dotcoms going public circa 1999 were all legitimate deals, with correctly disclosed numbers, and pages and pages of risk factors. I know, because I drafted and proofread many of those pages of risk factors myself.
The notion of whether we protect people from bad outcomes misses the point: our system isn’t designed for that. It’s designed to tell prospective investors all the material facts before they invest. Those who say that our assessment of who can and should be able to invest in non-registered securities, such as angel investments in private startups, tend to narrow the issue too much. Those who want to relax the rules often think that these “great deals” are out there and only for the rich. They forget that most of these investments do not create positive returns. And for those who argue that even further reductions(!) in the accredited investor thresholds should be implemented to increase the capital available to startups, they haven’t done the math on the differences in wealth between the original numbers and the current numbers: simply put, people who qualified as accredited investors in the past were wealthier, meaning more able to withstand the volatility and liquidity problems of unregistered investments, than those who qualify at those same wealth or income numbers today. (In other words, inflation happens.)