“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.
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?
The sheep have been shorn.