Crowdfunding · Venture capital

What is the opportunity with Title III crowdfunding?

Michael Brill Technology startup exec focused on AI-driven products

January 29th, 2016

There have been a couple threads on equity crowdfunding here, but with Title III funding portals getting much closer to launching, I'm trying to puzzle out what those first portals are going to look like... and will these be filled with the dregs of the investment world as most existing equity portals believe. 

The basic argument is that there is a vast over-abundance of capital from both institutional and accredited individual investors, and the better companies will get access to that through venture firms, professional angel investors/syndicates and 506(c) type funding portals. What's left over gets dumped into Title III portals where less affluent investors have to pick through to find the decent stuff... kind of the inner city 99 cent store of finance. 

What is the counter-argument?
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Chris Kitze CEO at Safe Cash Payment Technologies, Inc.

January 29th, 2016

This was never about leveling the playing field for the little guys. You'd need to repeal the Securities Acts of 1933 and 1934 which gave the big boys the monopoly of funding the best companies in the name of "protecting the children". There is another way to skin this cat and I'll share the concept with you. The company offers a "lifetime service account" and sells it at a steep premium to the price of the service. In other words, the customers are agreeing to fund the company by buying products in advance "for life". If the company is sold, there's a buy back provision that allows the company to buy back their account, less any usage, at a premium to what they paid for it to convert it back to annual service. I'll need to carefully think through the accounting treatment and I'm sure the lawyers will gripe, but you are not selling any securities and you can sell this directly or through affiliates, like any other internet product.  We're considering this approach for a company we have in Iceland that sell private and secure communications.

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

January 29th, 2016

I don't think that a lifetime contract to deliver a product or service would be a security but neither is it Title III crowdfunding.  I find no fault with Mr. Brill's original comments. Even many good companies will not succeed at equity crowdfunding.  It is expensive and very few of the advisers who are lining up to help them have any real experience raising money from investors.  I covered this in more detail in a recent blog article at   Equity Crowdfunding - What the Crowd Expects
Anyone serious about funding a business through equity crowdfunding is welcome to contact me before you start or at any step along the way. 

Robert Clegg

January 29th, 2016

Shout out to Chris for that cool slice of advice. 

You should also consider selling actual units of your product to "digital wholesalers". They purchase the product at the wholesale price and when you sell the inventory, they get a return. The legal ground work for this was done by appBackr.com 4 years ago or so. Our developers were pre-selling their app concepts. People bought them at wholesale and we disbursed funds upon sale automatically through Paypal to all those in line. We won Paypal's Developer award that year for the innovation.

As I recall, you have a high profile product business people would want to be a part of. Could be really fun to pick hot sellers. Better yet, you could make a great social community out of people who fancy themselves as in the know about your product by listing leader boards in all kinds of categories.

Set yourself apart from the crowd ; )

Paul Niederer Founder Raiseworth

January 29th, 2016

Physically the portals wont look much different. However the investors and the operational methodology will be different for the successful Title III operators than the Title II ones. In saying that some Title II operators will gain say 5 to 20% of their raise from a Title III crowd due to people following Accredited investors they admire.

Offerings in Title III end up there because they are ordinarily not ready for accredited investors. They are often too early and simply do not have the numbers to get traction in the more professional sectors. For this reason they have to gather people 1, 2 and 3 degrees out from the entity. These people are a hybrid of traditional friends and families. To achieve this they need to have a platform built on "investor aggregation" techniques. Meaning through a process of communication, connecting, nurturing and enthusing, people are gathered during pre-raise activity, until the offering goes live and at least 40% of the investment has been identified.  The reason they need to do this is that people will be making the decision to invest emotionally rather than analytically. 

I've written a few articles on this based on my experience running a platform that has had around 300 Title III like raises.  http://www.paulniederer.com/2015/10/investor-aggregation-for-capital-raising-and-the-campaign-approach/

Your sentence "What's left over gets dumped into Title III portals where less affluent investors have to pick through to find the decent stuff" could be read as true depending on your viewpoint. How I view this is that there are thousands of businesses not headed for IPO or trade sale but simply local or neighbourhood or niche  businesses that need funding to get to the next level. They are not "left over" as they are never assessed by accredited investors as they are not yet ready for them. There will be some decent stuff there but not necessary with the analytics more experienced investors require.

Robert Clegg

January 29th, 2016

Michael - MVP - let me order a case of wine I think is going to sell out in 3 months. Give me a 20 or 30% return there and you have ....

Fan Duel for Wine.

-R
Keep it simple, execute. Sell. Is this a pivot for you?

Michael Brill Technology startup exec focused on AI-driven products

January 31st, 2016

That's awesome Victor. This is "testing the waters" for a Reg A+ (aka Title IV; aka Mini IPO) offering which can be up to $50M and include non-accredited investors. Title IV definitely has the potential to dwarf Title II & III offerings - I think this is what Indiegogo is looking to do as there's too much liability, too much cost and not enough upside for most folks to do a horizontal Title III funding portal. I'm going to guess that 40% of the 2016 Wharton class will be starting Title IV-related services. ;-)

But it requires certain scale as it can easily cost $100K just to prepare the offering. Not for your local dry cleaner, restaurant or winery.


Brandon Knicely Cofounder at Third Drive | Innovation Leader | Investor | Recovering Tech Exec

February 1st, 2016

What I find new and rarely discussed in the crowdfunding space is debt, equity and rewards products that are built for local 'investors' for local gigs that already have cashflow, but don't have an appetite for national expansion, ie a local Kava bar, coffee bar, co-working spaces, salons, spas etc.  None of these deals would hit the institutional radar, but add value in the local market and folks have a desire to participate.  They support a local lifestyle and get a reasonable and predictable return.  This market in aggregate could be large and significant in stimulating local business.  

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

January 29th, 2016

Michael: I know that "honest lawyer' is an oxymoron but I have sued a lot of scam artists over the years and met a lot of seniors whose lives were devastated by them.  I am interested in your platform for wine lovers. My ex-wife was a classically trained professional chef who knows lots of chefs and winemakers. If your portal needs a securities lawyer please feel free to call on me.

Michael Brill Technology startup exec focused on AI-driven products

January 29th, 2016

Hey Chris... that sounds downright pedestrian compared to other Icelandic financial engineering hijinks. ;-) 

I don't understand the details, but superficially it sounds like a security to me. I'm not sure how you rationalize a financial return based on the sale of the company as some non-investment principle. 

Michael Brill Technology startup exec focused on AI-driven products

January 29th, 2016

Hey Robert.

I am working on a Title III funding portal for "lifestyle" businesses. The idea is that there are industries filled with companies unlikely to have exits but can provide lifestyle benefits such as product discounts, unique experiences and other non-financial returns that add significant value to the normal financial returns. So would you rather invest in (1) a strip mall at a 7% return or (2) a winery at 7% plus a case of wine plus 50% off for friends & family plus invite to events plus a business card plus maybe writing off some of your trip to Napa, etc.? Incorporating some social elements into the investment side as you mentioned in a great idea.