I was part of the discussion for this idea prior to Aidan submitting it for approval. I really think this is a great proposal.

One of the things I want to point out that wasn't mentioned in the idea description is the potential range of scale. From a small ice cream cart to the owner of a family owned grocery store and beyond, as long as you can prove to investors that your business has potential.

Once the legalities for the system are ironed out I think the sky is the limit.

Is there any expert on the legal side of these money/shares/bank/micro-payment type of ideas. Could be great, is it legal to set up your own stock market with real money?

Also; what does IPO mean?.. This the google-wikipedia thing:

"An initial public offering (IPO) is the first sale of a corporation's common shares to public investors. The main purpose of an IPO is to raise capital for the corporation. While IPOs are effective at raising capital, they also impose heavy legal compliance and reporting requirements. The term only refers to the first public issuance of a company's shares; any later public issuance of shares is referred to as a Secondary Market Offering. A shareholder selling its existing (not new) shares to public on the Primary Market is an Offer for Sale."

That brings me back to the legal side of it.

I'm not a legal expert, but I don't see any reason why this shouldn't be possible. Thinking about it, these sorts of transactions happen all the time - people get investment in their start-up or small business in exchange for equity. We're just making it easier for them to get investment from people they don't know.

Some interesting reading can be found at this SEC link (specifically for the US). http://www.sec.gov/i...bs/microcapstock.htm It talks about microcap stocks, which are for companies with a low market capitalisation, and how their stocks are traded. These are the ones you get spam about. However, the trading of their stock is not illegal, and nor is it as highly regulated as those traded on e.g. the NASDAQ.

If there is a legal problem, then this idea won't survive the "market test" stage. If there is no legal problem, then this idea could be revolutionary.

http://www.sec.gov/about/laws.shtml

The important bit on that page is this:

----
Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:

* private offerings to a limited number of persons or institutions;

* offerings of limited size;

* intrastate offerings; and

* securities of municipal, state, and federal governments.

By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.
----

Given the limited size of the investments, I'm reasonably confident this site would fall into the "offerings of a limited size" category. I'm still trying to nail down what the size limit is - upon reading the Act itself, it seems to be $5M, but I'm not a legal expert, and the document is written in Legalese.

Its definitely a cool idea, and I think even a lesser version of the site could be useful in case the legal issues are just too overwhelming. By lesser version, I mean something where the site was not a full blown exchange, but simply hooked up buyers and sellers but did not necessarily facilitate the transactions. If it was a full blown exchange though, I think an auction approach would be nice.

My own conundrum is that I am holding private shares of two previous companies where I worked and it there is no good place to sell or advertise the shares. I would love it if one or both of my previous companies hooked up with the proposed site to give my shares some liquidity. Its not like they are deadbeat companies either, its just that they are not public and I cant sell them in a few mouse clicks like publicly traded stocks...

I do like this concept of microinvestments. You know, I considered something vaguely related to this as a method to raise money for my own interests but never thought much of that idea. However, in the way that you have presented it and phrased it, I now like the idea.

Perhaps this page I just found will be helpful in sorting out some legal questions that have been raised: http://www.cfss.com/info.htm I expect there to be a lot of complicated issues to sort out but I am no lawyer so I wouldn't really know anything about possible complications.

One question I just thought of though is how do the business report their profits and how do investors trust them? Maybe the business owners will be required to show their tax returns or something?

motigiddy> One question I just thought of though is how do the business report their profits and how do investors trust them? Maybe the business owners will be required to show their tax returns or something?

In the UK, a company must declare their annual turnover and profit to the Government. This data becomes public record, and the company can be held accountable for audit to that figure, if the Government so decides (the company tax is calculated on those figures).

Not sure how it is in other countries - are company tax returns public records in the US? I definitely think there needs to be some kind of official document to prevent fraud.

I would be worried about the possibility of potential market abusers. The scope for this in an unregulated market is huge and I can see this attracting the wrong sort of people; any half-smart broker could manipulate this kind of market during their lunch break.

You would need some kind of surveillance and regulation to allow for investor confidence and promote liquidity.

jamesm> This is a relevant point, but I'm thinking that until the exact model of the site and exchange has been finalised, we won't be able to think of ways to combat any possible abuse :-)

One good thing is that the crowd will help to point out all the potential pitfalls.

Thumbs up from me.

Do you consider it on top of paypal? Because, if not, if you want to build an independent system, you have to do quite a lot of banking-like activities... which is outside our mandate here :)

When do you people usually meet on IRC? I feel left out :(

Don't see how this can work in the Cambrian world. Build a small mass-market product, test it, abandon it early or make the next incremental addition if warranted. I think this has so much risk (lawsuits) that it would easily sink Cambrian.

BuddySaul> I think that Cambrian House will be sure to limit their liability for any of the services/products that end up getting built by the crowd. As for the "build it quick -> test -> improve or abandon", I disagree that this idea doesn't fit in with that.

Cambrian House is an area filled with entrepreneurs - I'm sure some of them would be interested in funding their own businesses via this site (certainly a lot less expensive than giving away the farm to VCs). Technology companies will probably be early adopters of this kind of system - and there are plenty of people out there who do a Direct Public Offering (as I've found out it's called) through more traditional means - one microbrewery advertised the sale of their shares (on their website) by mentioning it on the labels of their beer bottles.

I don't think even Cambrian House know what will work and what won't - I could imagine there will be some ideas that are *extremely* quick to market and others which take longer. I think this idea still fits in with their submission guidelines in the FAQ: mass market appeal, available via the Internet, and a first version could be done in six weeks. We have no idea how long it will take after that to reach critical mass. All new businesses need time to make money - many "overnight successes" start slow then get a huge hit all at once.

I very much think the idea has great potential and I don't think we should argue an idea away on legal conjecture. We are not legal experts and i wish CH could solicit some membership from this profession as it would be very handy to have this expertise on board.

In the absence of community legal expertise, i think Aidan is right, the market test is where it will be determined if it can fly legally or not and for now we should focus more on the appeal of the idea, technical viability, competition and its merits and financial rewards.

All ideas, like this, that push the envelope of traditional business will need some degree of legal evaluation before development resources are put in place anyway.

In regard to the validity of financial reporting, i think you must insist on accredited audited financials from any entity that wishes to transact through the exchange. These auditing bodies now carry liability for presentation and agreement to declared financials and they would then be the 'trustworthy' badge needed. This is how the other exchanges and public companies have to operate but you don't have to insist that the audit body is one of the big guns.

There would obviously be a cost attached to this requirement, which would be borne by the companies, but this would be the price paid for raising capital and would be a cost relative to the size of the business and its turnover and would in most cases be in place anyway. So i don't see it being an issue unless you are an ice-cream vendor and your mother-in-law does the accounts .. and if you were, who would want to invest in you anyway?

Initial company evaluation for justifying share value would have to come from the presentation of full financial statements from an auditing body in the first instance, so a relationship would already be in place.

Lets go forward :)

I really like this idea.

I'm far from being an expert in the matter, but can't shares be sold at whatever price while the company is private? The only thing that could prevent that is a shareholders agreement.

You could ask the companies that what funding through your site to create a new class of shares. Those shares can't switch hands, except by going through your site. That means that if I buy shares, the only place I can cash in on them is by reselling them through your site.

Users could bid on shares and the seller fixes the original price. That way, you won't have to come up with a way to price the shares.

This is one of the best ideas so far on Cambrian House, in my humble opinion.

Hmmm. Can't edit my post...

The first sentence, 2nd paragraph should be read as follow:

"You could ask the companies that want funding through your site to create a new class of shares."

Julius> Also; what does IPO mean?.. This the google-wikipedia thing:

I don't think this is being considered as an IPO. This is a equity sale to micro-investors.

As a private company you can sell shares in your company for any price you decide. You have to convince people to buy. I think it might be amusing to look at this from the point of view of:

1. company A offers the first 25% of their company to family and friends in order to get first round funding so they can start their business..

2. company B puts 25% (say 2500 shares to keep the math easy) of their company out to the microbusiness community where no investor can grab more than 10% (250) individual shares.

These are the same thing and though they require declaration, neither consists of an IPO.

I do know something about this topic, so here goes. (I have practiced securities law in the past and had a special interest in very small public cos. I'm also a lifelong observer of fraud, an ever-fascinating topic).

The micro-stock exchange: it's a great idea ... for a world where everyone is honest. If you find such a world, please let me know.

The best model, imho, would be along the lines of what the Grameen Bank and other successful micro-credit communities have used. It takes personal accountability, complete transparency, and a strong sense of honour within the community. So... only deal with people you know and trust - and where they have as much at risk as you do.

The network has to be "by invitation only" and must have some pretty strong gatekeepers for this to work.

I will watch this project with interest, and I hope it goes on to develop further. It's not a new idea (so what, most ideas are not 100% original) but there is room here for innovation.

And btw, it is not well suited to being run by stockbrokers. The typical brokerage business model doesn't fit with such small ventures. But that's another story.

This is very similar to Prosper.com, which offers person to person lending

I am also not a lawyer but in some international jurisdictions there are rules about approaches that can be made to "unsophisticated" investors. So some work on the inplications of a web based "offer" which reaches many jurisdictions might need to be done.

Sorry to be a negative nelly. You've got a stack of securities law issues to overcome - in the US, for example, unless an investor is considered in law to be sophisticated enough to make their own decisions you have to jump through a whole lot of hoops to get their money without opening yourself up to lawsuits if the idea busts.

There are lots of websites trying to hook up investors with small businesses.

Alternatively - if you could set up an angel investment fund - figure out how to overcome any legal issues and then have a panel (informed by the CH wisdom of crowds?) make investment decisions then maybe you can make this fly.

I have already commented but didn't vote earlier. Have just voted it up, for what it's worth.

Securities laws and the internet do not mesh very well - one operates locally (securities), the other is world-wide. So it's very difficult to make a meaningful general statement about what the legal obstacles are / might be, and that's sort of beside the point.

The general concept of having a truly honest marketplace for investing in and selling securities in start-ups, is a good idea.

I said before, this is a topic I do know something about and if it gets going I may be able to provide some useful comments.

Before I forget this point, I think that if the market were run in a way that separates trading from investing - i.e. so that it is virtually an illiquid market - it might work a lot better. Invest and hold, not invest and churn / speculate / hype / pump and dump the stock.