In life, whatever it is we are seeking will not arrive in the form we are expecting.
Such is the case with raising equity in a post JOBS Act market – something that fascinated but at the same time confused many business owners.
On a quest for one of my clients, a rapidly growing Los Angeles based start-up with an established customer base, talented team and a few investors on board, I was asked to clarify the existing options of raising capital online.
The reasoning of the founder, who is a serial entrepreneur and an investor himself, was simple. He has been an avid supporter of the JOBS act (particularly its Title III) and patiently waited for the new rule to be enacted which would let his dreams come true: thousands of his loyal customers having an opportunity to become shareholders of his venture.
Now it is time to move on.
What is Title III anyway?
It was “the spring of hope” but it has ultimately altered to “the winter of despair”, as only Charles Dickens could describe.
Since its birth on April 5, 2012, when President Obama signed the JOBS Act into law, equity crowdfunding has become a byword in aspiring entrepreneurial minds encouraged by the prospect of raising capital directly from the public online. As opposed to a full-fledged IPO, such form of equity financing was believed to become an attractive, not to mention quick and cost-sufficient tool for capital injection to keep start-ups thriving known for their mortality rates.
As of now, nearly three years later, the Security and Exchange commission (SEC) is still in the process of reviewing the most debatable (and a game -changing) provision of the JOBS Act – Title III, which when in effect in an unclear future, will enable businesses to sell up to $1 million in securities to the public in a one year period.
Presently the opportunity to invest into privately held business is limited by the law to only accredited investors – individuals with a liquid net worth of at least $1 million or an annual income of at least $200k. The most recent numbers I have – there are 8.6 Million accredited investors in the U.S., and only 3 per cent of them are investing in small businesses (which translates roughly to 0.1 per cent of a population). They are adoringly called “angel investors” – now you know why. As a numbers person, I see the probability for you to meet an actual angel might be just the same!
The Metamorphosis of Equity Crowdfunding
What does it all mean for your venture? The good news is that equity crowdfunding has transformed into something not less sensational than Kafka’s gigantic insect – into the online investment banking for start-ups on the one hand, and a “beauty contest” of potentially new portfolio companies displayed on the investors PC screen on the other.
Truth be told, private placements (which your attorney might also call Regulation D offerings) have been utilized by founders for a long time but the new technology and the JOBS act brought such offerings up to the World Wide Web.
Let’s have a clear understanding: the majority of equity crowdfunding (or crowdinvesting) platforms that have recently flooded the market, are registered broker-dealers companies (or have to work through registered broker dealers) and fundamentally is an alternative form of online investment banking for start-ups and early stage companies where as of now not a crowd – but only accredited investors are entitled to invest, just like in the good old days.
Essentially, such platforms act as a middle man between a young venture looking for capital and accredited investors registered on a platform’s password protected website. Some of them charge success fees just like investment bankers, typically in a range of 4-8% (FlushFunders, GateImpact , OneVest, CircleUp, MicroVentures, etc.) or flat monthly fees as an informational (“service”) portal where no securities transactions are executed (such as EquityNet, CrowdFunder, etc.) or a combination of both (SeedInvest).
Lesser number of platforms have imposed a VC/angel investing model and act as investment advisers – for example the oldest and the largest player, AngeList, which enforces carried interest (a share of the profits of an investment) or platforms such as FundersClub, Fundable, OurCrowd, etc.
This Is Where I’ll Fund You
If you are weighting up options on whether raising capital via an equity crowdfunding platform is a viable option, there are a few important points to remember:
– There are numerous operational equity crowdfunding platforms – do your homework and pay attention to the terms they are suggesting, as well as their industry focus (if any).
– Once you’ve made a choice – it is a commitment, no flirting is acceptable. You are not advised to be featured in more than one platform at the same time.
– You are being chosen and scrutinized too. Most platforms are making money from the success fees (or carried interest if it is a VC model), they are in a fierce competition for the investors and therefore they need the high quality deals. One of the platform owners disclosed they are putting on-line not more than 2% of the deals they are being pitched with.
– Some of the platforms have a certain template to fill in where you are asked to introduce the key points of your business plan, company valuation, current level of revenues and financial projections; some platforms ask for your pitch deck and a business plan. But in all cases a good groundwork from you is expected and a full disclosure is welcomed.
– You’re responsible for doing diligence on the investors and verifying they’re accredited (check out VerifyInvestor)
Finally, remember – you are entering a highly regulated and sophisticated world of private investing – know the rules well and constantly educate yourself, never treat knowledge as a fixed asset.
But the most important point: focus on building a solid business first and foremost. You will be found – and funded.
Oh – and hire a security attorney.
Victoria Silchenko, Ph.D. is an alternative funding expert, Founder & CEO of business consultancy Metropole Capital Group and Producer of the Alternative Funding Forum. She is also an Adjunct Professor on “Entrepreneurial Finance” at CalLutheran University. LinkedIn: www.linkedin.com/in/victoriametropolecapital/, Twitter @MetropoleGlobal