Isn't P2P Venture Capital Just Going Public?

from the the-SEC-might-have-an-issue-with-that... dept

As there appears to be a growing market for p2p lending services, that has some wondering if there's also a market for p2p venture capital as well. In p2p lending, a group of ordinary folks all team up to lend people money. The various players in the space have had somewhat mixed results so far, but there's a lot of attention. However, for most companies, getting access to capital involves options between taking out a loan (which needs to be paid back plus interest) or selling equity (usually to venture capitalists). In that case, the money comes from someone who takes some percentage of ownership and hopes to cash in not on the interest, but on the growth of the value of his or her shares. So, it might make sense to wonder whether the p2p lending companies might eventually move into p2p venture capital as well... except that we already have p2p venture capital: it's called the public equities markets. If you actually tried to do that with private companies, you'd quickly run into all sorts of trouble with the SEC, which is pretty strict in terms of regulating how a company goes about raising money in exchange for equity. In fact, there are many who believe that a startup may be toeing the SEC's line simply by saying that it's out raising venture money. So, for a variety of reasons, both regulatory and because public equities markets already are p2p venture capital offerings, it's hard to see there being a huge market for companies to get into offering p2p venture capital.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    identicon
    Anonymous Coward, Jan 8th, 2008 @ 8:01pm

    Execpt for the fact that....

    ... you have to have $100 million in revenue to afford/justify the expense of SarBox compliance....

    One CEO of a very well known, but smaller, public tech company told me it costs $1 million to $2 million/year just for ongoing compliance.

     

    reply to this | link to this | view in thread ]

  2.  
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    Anonymous Coward, Jan 8th, 2008 @ 10:40pm

    I don't see the parallel here at all. The SEC exists to protect the public on open exchanges. Venture capitalists bypass these protections in hopes of bigger returns. p2p venture capitalists, I presume, would be doing the same, and thus bypassing the open exchanges as well as the onerous SEC compliance requirements.

    The only question is whether the SEC will allow informed consent agreements between two willing parties, or if it will use its bully pulpit (as it has before) to dictate the terms of trade.

     

    reply to this | link to this | view in thread ]

  3.  
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    Mike (profile), Jan 8th, 2008 @ 10:56pm

    Re: Execpt for the fact that....

    ... you have to have $100 million in revenue to afford/justify the expense of SarBox compliance....

    But if you're selling shares via a P2P system, you would have to be SarBox compliant as well. You'll be offering shares to the public.

     

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  4.  
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    Mike (profile), Jan 8th, 2008 @ 10:58pm

    Re:

    I don't see the parallel here at all. The SEC exists to protect the public on open exchanges.

    But what is a P2P VC if not an open exchange for the public?

    p2p venture capitalists, I presume, would be doing the same, and thus bypassing the open exchanges as well as the onerous SEC compliance requirements.

    You seem to skip over the key part. By opening up the VC process to the public, you are selling shares to the public, which falls under the SEC.

     

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  5.  
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    Anonymous Coward, Jan 8th, 2008 @ 11:11pm

    499

    It seems that I remember there being some kind of exception to SEC regulation if you've got 499 or fewer investors. I think I even read (maybe here on Techdirt) about some large companies (banks?) using this exception. Maybe this would work for p2p investing as long as you limit the number of investors.

     

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  6.  
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    Anonymous Coward, Jan 9th, 2008 @ 1:10am

    Re: Re: Execpt for the fact that....

    Not necessarily. If everyone one in the P2P was a Qualified Investor, then it would NOT be a public offering, just syndicated or mezzanine finance.

     

    reply to this | link to this | view in thread ]

  7.  
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    Anonymous Coward, Jan 9th, 2008 @ 1:12am

    Re: Re: Re: Execpt for the fact that....

    Following up on my own post, the SEC modified their rules regarding private investment in 1997 to allow just these sorts of structures:

    http://www.ici.org/issues/fserv/arc-reg/97_sec_hedge_rules_final.html

     

    reply to this | link to this | view in thread ]

  8.  
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    Mike (profile), Jan 9th, 2008 @ 2:07am

    Re: Re: Re: Execpt for the fact that....

    Not necessarily. If everyone one in the P2P was a Qualified Investor, then it would NOT be a public offering, just syndicated or mezzanine finance.

    That's true. That's perhaps an exception to what I discuss above -- though, even then you would still need to be careful how the offerings are presented. Plus, it would definitely limit the market pretty drastically. If the idea of P2P finance is "micro" investing among many, many people, limiting the market to accredited investors might not be particularly useful.

     

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  9.  
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    Martin Edic, Jan 9th, 2008 @ 9:08am

    SEC casts a wide net

    You have to be extremely careful. We wanted to acquire investors for a portfolio of domains we own and were informed by our attorney that this could be viewed as a securities transaction even though domains are IP, not shares in a business.
    The problem is the scam factor- stock and securities scams are the drivers behind these regs. The SEC is protecting unsophisticated investors from rip-offs. Also it is your responsibility, as a company seeking capital, to determine that the people you make an offering to are 'Acredited Investors' ($2mm in liquid assets or $250k annual income for at least 3 years). There's no way you could do this in P2P exchange.
    That being said, Sar-Box is an insane burden for smaller companies.

     

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  10.  
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    Will, Jan 25th, 2008 @ 3:52pm

    P2P

    Thanks for the link love Techdirt!

    We think that there is a potentially large emerging market for P2P, but yes, the SEC is definitely going to step in at some point and lay down some rules.

     

    reply to this | link to this | view in thread ]

  11.  
    identicon
    fredericbaud, Mar 5th, 2008 @ 5:01am

    Discussing P2P Finance at BarCampBankSF

    All,

    We will be discussing P2PVenture, P2PLending, Personal Finance and all the subjects concerning bank & finance 2.0 at BarCampBank SF in Berkeley CET on March 29 2008. Any innovator or disruptor should definitely consider joining.

     

    reply to this | link to this | view in thread ]

  12.  
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    david, Mar 18th, 2008 @ 12:48pm

    List of Venture Capital Firms

    I came across what looks to be a good list of VC firms in the San Francisco/Silicon Valley area. It's from Google Answers, so I assume its more credible than most:



    Venture Capital Firms for Hi Tech

    http://answers.google.com/answers/threadview?id=740969

    It's worth a look.

     

    reply to this | link to this | view in thread ]


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