Is there still confusion about raising equity based capital through the crowd - when, why, how?

Karen Rands Compassionate Capitalist & Venture Catalyst

March 30th, 2016

When the idea of crowd funding for equity first became part of the Jobs Act in the US, there was a lot of confusion on what an entrepreneur could or couldn't do and a lot of 'experts' popping up to help lead the way. Many, many months later, now that all three types of equity crowd based financing is legal there seems to be continuing confusion regarding terms, structure, process, and when to use each type (CrowdFund, 506C and REG A+).

What have you found to be the situation in either considering a crowd funded endeavor, investing in a crowd funded opportunity, or in advising companies on using the crowd to fund an opportunity?

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

March 30th, 2016

Overall equity crowdfunding has been woefully unsuccessful. You are correct that many of the "experts" have never raised a dollar in the capital markets. The rules vary depending upon how much you need to raise. The main problem is that companies do not have the assistance of an underwriter who is in the business of raising capital and dealing with investors. So in addition to developing a great new widget, you need to be an expert fund raiser as well. My partner and I have 80 plus years working in the mainstream capital markets and offer complete crowdfunding services, soup to nuts, if you are interested.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

March 30th, 2016

What crowdfunding sites are run by professionals? Anybody from Goldman Sachs or Merrill Lynch with actual experience working at these platforms. Only a handful in the entire crowdfunding industry. I spoke with 2 attorneys at one of the leading platforms last week. Both had worked at law firms or regulators. Neither had actually worked on a real public offering. Nobody at the platforms actually speaks to investors or understands what investors expect. Nobody really cares. Due diligence is almost non-existent. I spoke with one firm that does it for a dozen platforms and again no training and no practical experience. You think that you can learn due diligence or public offerings from a text book? I was trained by investment bankers. Direct public offerings are not new. They have been around since the mid-1990s. The SEC was bringing fraud actions before 2000. Studies don't account for fraud until after the loss. Elio is a probably a fraud Mr. Brill. They have no product although they have been promising delivery for quite some time. They are insolvent, have no patents and still need about a quarter of a billion dollars to bring their product to market, if ever. Med-X did a Reg A +. It looks and smells like a penny stock fraud. The principal has two regulatory strikes for selling unregistered securities. What many people call a crowdfunding success is raising the money. Success in the capital markets is getting the investors a profit. Tell Merrill that an offering was successful if the stock never trades above the offering price. No customer in crowdfunding has made a dime. That has not happened and is not likely to happen. The capital markets are run by and for the capital, i.e. the investors. The crowdfunding industry does not even think this way.

Martin Omansky Independent Venture Capital & Private Equity Professional

March 30th, 2016

I had high hopes for the equity Crowdfunding model, but the current laws and regulations make such offerings expensive, awkward, unmanageable, restricting, unreasonable, and impractical. The law firm of Pepper Hamton (headquarters in Phila., offices in many cities) has made a special study of the equity Crowdfunding model. Their Boston office is particularly well-informed. I think Congress needs to rethink the model so that it can be used by those of us in the real world. Sent from my iPhone

Corey Schwartz President at Loanatik.com

March 30th, 2016

What we have found is that regardless of the type of crowd funding, the word makes investors very nervous. So much so that we have dropped the word from all of our new marketing materials. We'll now talk about loan syndication or structured finance or fractional interests or anything else to avoid using the word crowdfunding.

Michael Brill Technology startup exec focused on AI-driven products

March 30th, 2016

This is a very weird thread. Investment crowdfunding is in the top of the first inning - way too early to call it "woefully unsuccessful." We're just now seeing the first Reg A+ offerings, Reg CF isn't even live yet. If you include 506c, I think it'd be hard to argue that it's not getting traction.

Irwin, can you provide the source for your fraud claim? Every study I've seen shows that it's largely non-existent so I'm really interested in what you've seen to the contrary. Also, which mainstream investment crowdfunding sites are run by "amateurs who have no experience raising money?" Is this companies like CircleUp, Fundrise and Real Estate Mogul?

I do agree that investment crowdfunding isn't as cheap as most think (Elio probably spent $500K to raise $16M). But most of that spend is on *marketing*, not legal fees.

Adam Pressman

March 30th, 2016

Agree with Corey that the term has some unhelpful connotations in the context of investors (as opposed to customers at the IGG or KS Internet Shopping Malls). We use the term marketplace financing as the entrepreneur is seeking "investomers" or people as interested in the company's sustained success as they are in the product or service being offered. That's the key focus, not what kind of exemption to seek or whether you'll do well with accredited or unaccredited investors. There are ways to address both (not in the same campaign). That we're learning from the UK and Europe (a half-decade ahead of us). Also, it doesn't have to be equity, probably shouldn't be equity, for a startup. Revenue royalty for instance is better for the entrepreneur and his potential investor. The important point is that crowdsourcing finances, like everything else, is just a method. Not a movement. Like any method, those skilled in using similar methods, for instance, capital formation experts like Irwin above (disclaimer: he's an advisor to Crowdfund Roundup) are going to know the most, make the most and do the best work with crowdfunding, whatever you choose to call it.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

March 30th, 2016

Martin: Congress doesn't need to rethink the statute nor does the SEC need to rethink the rules. Crowdfunding is not cheap and it is not for every company but it is doable and workable as it is. Most companies are not prepared to pay what it takes.The crowdfunding industry is populated by amateurs who have no experience raising money from investors. There is a ton of bad advice and a lot people selling videos as if you cannot raise money without one. There is a significant amount of fraud because the "professionals" don't know how to keep it out. No one and I mean no one gives a rat's butt about the investors as if they think crowdfunding is sustainable without them. I could probably help a good company raise $1-2 million every time, but you have to see the look on their faces when I tell them what it costs to hire someone who actually knows what they are doing and I am much cheaper than Pepper Hamilton.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

March 31st, 2016

Failure does not define fraud, but repeated failures will undermine the crowdfunding industry. At the very least, a company raising funds from public investors is required to disclose all material facts. Any intermediary is liable for fraud if it occurs and they fail to conduct an adequate due diligence investigation. The crowdfunding industry does not have the mechanisms in place to do so and overall takes no steps to prevent fraud. Make no mistake a platform can make a lot of money, they just don't choose to do it right I singled our Elio because they took deposits from about 50,000 people for a product that does not exist. If Ford or Unilever did the same you bet people would call it fraud. How much due diligence does the VC industry employ? In many cases quite a bit. My partner and I conduct due diligence for VC funds and angel groups but only those that are willing to spend what it takes. You would probably be surprised how many patent lawyers work for VC's. Sophisticated investors as defined under Reg.D include banks and insurance companies which make up the bulk of the private placement purchasers. The idea that individual investors are sophisticated because they meet a minimum net worth standard is a myth. Not every start-up deserves to be funded. That is the great truth that the crowdfunding industry does not want to hear. Right here on FD are companies that claim they have a great idea who want funding from strangers but their friends and family will not put up enough money for them to do an offering correctly. These are people who have such a great idea that they refuse to go to the SBA and borrow against their home to make it happen like a million of other small companies have in the past. Many founders have no skin in the game. You should connect with me on Linked-in and get my blog posts. I write about crowdfunding about once a month. The blog is read by several members of Congress, senior officials at the SEC and FINRA, regulators in about a dozen states and senior execs. in the financial industry. There is a helluva a lot of things about which I know knowing, but I worked in the capital markets for 40 years and taught at a well respected business school. I am a fan of crowdfunding but, as I said, it is an industry run by people who have no experience actually raising money in the mainstream markets.

Michael Brill Technology startup exec focused on AI-driven products

March 31st, 2016

Irwin, by your definition, any early stage company is likely a fraud because of a material chance of failure. While I don't agree with that definition, less sophisticated investors might. Most don't *really* know the risk differences between investing in Unilever or investing in this cool little kale chip company on CircleUp... and certainly have no good way of understanding valuation and liquidity options.

But, again, I think you conflate crowdfunding and early stage investment. How much due diligence goes into most <= Series A investments? Not much because the amount of money they're raising can't possibly support the level of diligence a public offering gets. Don't blame crowdfunding for this fact and certainly don't call it fraud.

As far as traditional financial institutions being primarily motivated by their investors' success... HAHAHA. Funny.

Michael Brill Technology startup exec focused on AI-driven products

March 31st, 2016

Martin, I think you're referring to Title III funding portal limits, not investment crowdfunding in general (e.g., Reg A+, 506c, DPOs). Having said that, I don't understand your references to the single offering $2,500 investment limit or investor accreditation. AFAIK, the investment limit per investor is in aggregate annually and there are no references at all to investor accreditation. Or am I missing something?

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