Wednesday, March 26, 2014

Last Call For Kick Started, Kicked Out

Barry Ritholtz makes a very important observation: this week's announcement that Oculus, the Kickstarter funded company making virtual 3-D gaming glasses technology that got bought for $2 billion by Facebook, proves that everything critics had to say about the deregulation of crowdsource funding in 2012's JOBS Act (including myself) was 100% accurate.

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.

And who got scammed?  Why, the Kickstarter backers, of course.

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.

Which just got turned into $2 billion.  The Kickstarter folks get a t-shirt for seeing their investment multiplied a thousand-fold.

And from a legal standpoint, thanks to the deregulation in the JOBS Act that the GOP created, they don't even have to cough up the damn t-shirt.  Legally, they get nothing.

Working as intended.  Have you contributed to any startups through Kickstarter or any other crowdsourced avenue since the JOBS Act became law?

Might want to reconsider in the future.  Very much so.

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