Fundraising · Venture capital

True equity crowdfunding just arrived, otherwise know as Reg CF. Boon or bust for entrepreneurs?

Adam Glickman CEO & Co-Founder at Graphic Armor, Inc.

May 18th, 2016

Regulation Crowdfunding, also known as Title III of the JOBS act, was adopted in May of 2016 as a way to reduce the regulatory restrictions thus making it less costly for companies to raise up to $1 million from both accredited and non-accredited investors. This means that companies who are looking to raise anywhere from $100,000 to $1,000,000 are now able to do so through FINRA approved crowdfunding portals. What are the potential risks and rewards for entrepreneurs?
Disclaimer: I am one of the first entrepreneurs to take this risk, having launched an equity crowdfunding campaign for my company this week.

Michael Brill Technology startup exec focused on AI-driven products

May 18th, 2016

Hey Adam... it'd be really, really awesome if you could share your experience here. We all have opinions on what's going to happen but not nearly as interesting as what's actually happening.

Richard PhD Global FinTech - Crowdfunding - Research & Policy | Strategic Advisory | Board Member | Author | Consultant

May 20th, 2016

Not going to wade into the debate - but some data.  First, we have no basis for determining the motivations of investors in Title III deals.  Second, it is likely that there will be a diversity of motivations for investors - but the social impact argument is not supported by date from UK and European Crowdfunding platforms.  Third, I agree that Title III has fundamental flaws - I was asked by SEC to advise them on investor protection provisions of Title III - and the SPV and increased cap would be greatly helpful.  However, if you look at the initial batch of 30+ companies who have been qualified, they don't fall under the broad generalizations in this thread.  I always say equity crowdfunding will make sense in a decade, and this is the first second of the first inning, so let's see how things evolve. I do agree that Title II makes more sense, but that is not a broad indictment of the utility of Title III - especially for firms with highly engaged followers from earlier rewards crowdfunding campaigns.

Michael Brill Technology startup exec focused on AI-driven products

May 18th, 2016

Adam, investor communication should be managed by the funding portal... but, yes, you have to treat each investor as an individual. 

Eileen (Hi Eileen!!). I think what you're referring to is the exclusion of any type of special purpose vehicle that aggregates investors into a single cap table entity. Title III disallows investing in "investment companies" such as these SPVs. While the funding portal should handle the broadcast communications to investors, you still have to (should) reply 1:1 if investors start asking questions. 

The bigger issue is that you are probably killing later stage professional financing because now you've got a messy cap table with tons of investors that you need to herd to make anything happen. Imagine what happens when a venture investor wants to renegotiate some right with 500 investors. Maybe you can get around it by not giving the Reg CF investors much in the way of rights, but that just cements the issue that these investments are for suckers.

To be sure, I'm bullish on Title III - but for lifestyle businesses whose investment returns combine financial (typically based on debt and rev share, not equity), product and experiences. 

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

May 18th, 2016

Mr. Gekhter: I wish Mr. Glickman well. I don't see these regulations as complicated or difficult. As I said, raising $1 million from accredited investors is cheaper and easier.  I represent VC funds, sophisticated investors and start-ups who want their funds. With all do respect to your hard work, Bill Gates attracted investors with his product (which he bought) not with his hard work. Investors don't care about the effort or the benefits that the product will give to the world. If you are having difficulty raising money it is because you are not paying attention to the bottom line.  I don't mean to be blunt, but I am a lawyer. No one pays me to be subtle. Most start-ups fail. Can you convince investors that you will succeed? Mr. Glickman has a product that has an established market. If he can source it at the right price, market it well and develop a good distribution network, he has a shot. That is what investors look for.

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

May 18th, 2016

Mr. Gekhter: If you want money from investors you need to focus on what the investment will do for them,. not what it will do for you.  Investors in small ventures want you to demonstrate that  their money will be spent bringing a product to market that will sell. They want a return on their investment.It is a cold, hard investment decision.  Your dream is not important to them.  If you want money from investors, give them what they want.

Eugene Gekhter CEO, Memorable. Founder, SharePay.

May 18th, 2016

It's interesting. What percentage of members on FD wake up every day thinking is today the day I'll find a partner/investor? How many consecutive days have they had this desire to fulfill their dreams? What percentage of us can say my venture got the capital it needed and I succeeded/failed vs. if only I had the chance to prove the success my business is capable of with the right resources? $1 million in capital to grow a business to an entrepreneur who has never raised money before is probably more than enough for the majority of us on here.

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

May 20th, 2016

Mr. Swart: Title III is an insignificant backwater of the capital markets and likely to remain so. That hasn't stopped many people who are involved with crowdfunding from claiming that it is the best thing since sliced bread. Investors have been seeking a return on their investment for centuries. There are certainly people who are motivated to  invest for social reasons, but I cannot imagine that it was the motivating factor behind the adoption of Title III. The argument was that there were many "deserving" companies that were being denied capital by Wall Street. "Deserving" was never defined. I represent investors that many of the founders  on FD would love to meet. The investors want a path to profits and a return on their investment, same as always. There is no data to the contrary and there is no reason to believe that there will be. I read pitch books all the time. Many are written by people who have good ideas but don't understand how to run a business or bring profits to the bottom line.  They need to hire  some professional help, but can't afford it because their idea is so good they can't even get their family and friends to pony up enough to get the company up and running.

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

June 4th, 2016

Mr/ Glickman: I looked at your offering and I don't see anything fundamentally wrong with it, but it seems that investors have failed to take notice.  If you had done the same offering as a Reg. D private placement, you could have actively solicited investors under Sec. 506(c) instead of waiting for investors to find you. If you solicit actively and correctly, you can reach large groups of accredited investors who have prior experience with private placement securities. The more aggressive your solicitation, the faster you get funded. The mainstream Reg. D market is quickly moving in this direction. Sorry we didn't connect earlier in your process.

Adam Glickman CEO & Co-Founder at Graphic Armor, Inc.

May 18th, 2016

Michael, I agree with your statement,

"IMHO, Title III's role is local/vertical/experiential/relationship-based investments with the bulk of the investments driven by factors other than traditional risk-adjusted capital return motivations. There are real opportunities there."

Part of our strategy is to appeal to potential investors who care about the issues of safer sex and sexual health. Sexually transmitted infections are at an all-time in the U.S.Graphic Armor produces the world's first FDA-cleared condoms that feature photo-quality custom print right on the latex. Our company's mission is to change the way people look at condoms by changing the way condom look and we have invited others to join us through our Ref CF campaign.

I believe that other cause related companies and the social entrepreneurs that drive them will also have opportunities to conduct successful equity crowdfunding campaigns by appealing to targeted communities that share their passion and values. I think we can all agree, these are very early days and how this plays out over time is anyone's guess.

Michael Brill Technology startup exec focused on AI-driven products

May 18th, 2016

Having said that, I'm betting that the initial Title III portals are going to be disasters. IMHO, Title III's role is local/vertical/experiential/relationship-based investments with the bulk of the investments driven by factors other than traditional risk-adjusted capital return motivations. There are real opportunities there.

But the first Title III portals are treating these offerings like junior Title II offerings and that's not going to work. It'll be clear that these are bottom barrel investment opportunities from companies that couldn't raise money from "professional" investors... and most of the companies have no capability to market the deals so they will go unfunded. 

Of course there will be exceptions, but unfortunately it'll take 12-18 months of a lot of investors' money to realize that Title III's role is enabling enthusiasts to get some skin in the game for companies they deeply care about.