[dicletian]

"All the small investors (often < $25k) invest in the Crowd Fund, which then invests as one entity in the startup."

So your company must create and manage a new investment vehicle for each startup to raise money on Wefunder? I assume so, otherwise the investors in one holding will incur the liability of the fund being sued by the investors/investment of another.

According to your FAQ, you are not charging any fees yet and have raised about $500k to support your operations. On top of operating the parent business, for each entity you will have to prepare and send out K1s, make numerous compliance-related and SEC filings, and correctly disburse funds once liquidity arises. As a fund, you'll also possibly have to prepare annual or quarterly mark-to-market valuation reports for your holdings. All told, this could run into the tens of thousands of dollars per entity per year.

What happens if your company runs out of money to properly steward the funds you raise? Do you have a strategy to mitigate legal / compliance costs?

[sochanger]

That's right, small investors invest in a separate investment vehicle for each company that will requiere many of the actions that you describe. Second Market and Funders Club work the same way, and the costs do not amount to 10's of thousands of dollars per year. We have set aside enough funds deal with the future costs of each entity.

[dicletian]

SecondMarket is a different animal -- they structure liquidity tenders for late-stage private companies and collect portal fees per seller, and, in the past, ordinary secondaries transaction vigs. They also run a large, traditional financial services business that has historically paid for much of their involvement in the startup world.

Funders Club is also a somewhat different animal -- they offer investors access to venture funds where risk is pooled, and also do single-purpose funds that resemble your product.

You are exclusively offering investors access to one investment and one set of risk. Let's say you can get it down to $4k/yr:

* Accountant to prepare and send out K1s to 50 shareholders $1000

* Delaware agent & franchise tax $400

* Legal, regulatory filings, 4 hrs $1000

* Your or your lawyer's time to give legally binding answers to questions from 50 shareholders $?

* Valuation analyst hired by you or firm, 5 hrs $600

* Broker dealer / misc / insurance $1000

These numbers sound pretty low to me but let's say you have economies of scale.

Making money solely when investors make money still seems like a reach. If you make 100 investments per year and have a decent team you will be burning a lot of cash -- the only way to recoup that cash will be to charge a transaction fee or keep raising money until carried interest pays out (which it often doesn't). Either way, it's something you should address in your disclosures.

It's one thing not to have a fleshed-out revenue model if you are a consumer site: nothing will happen if you die except for some upset users, but you can't just suddenly unwind a group of 400 investment funds when the underlying capital is tied up in illiquid private stock.

[niggler]

"What happens if your company runs out of money to properly steward the funds you raise?"

That's a very important question.

They can't even accept money from non-accredited investments until early 2014 (SEC period after JOBS act goes into effect is supposed to end in early 2014). I think they have time to sort that out.

[akiselev]

"they have time to sort that out"

Not really... There is a big difference between managing the process for one company and doing it for many. The latter will quickly cause costs to spiral out of control unless the team can get some experience with the regulations now.

In the world of dealing with regulations, one year may sound like a lot of time for one startup but if you have to handle the paperwork for dozens, it's a whole different ball game.

[niggler]

It takes a team of 2 people 6 months and 25K to set up a broker-dealer, do relevant background checks, pass relevant exams, pass audits, get personnel exemptions, SRO agreements, etc. (https://www.sec.gov/divisions/marketreg/bdguide.htm). That's a one-time process and WeFunder may have done it already.

Once that's done, setting up separate legal investment funds is a 1 month initial process (and its fairly simple to scale this up -- the individual investment funds would be set up in parallel). There's some quarterly paperwork and some yearly paperwork, but it's entirely within the abilities of one person to handle "dozens"