7 Benefits for Crowdfunding through Existing Groups

This is a guest post by Kiran Lingam, a corporate and securities lawyer and regular writer and speaker on crowdfunding and the JOBS Act.

Issuers and portals would also benefit from crowdfunding for groups. From their perspective, adding crowdfunding to existing organizations and communities will be far more effective than trying to build communities around crowdfunding campaigns for the following reasons:

1.  No One-Off Community Building.  In a typical crowdfunding campaign, a new community has to be rebuilt for each individual campaign.  With a group centric campaign, a community already exists and that community can be used to connect with other communities to create exponential growth.

 2.  Built in Channels / Concentric Groups.  A group would likely develop set of other groups that is consistently shares deals with, providing built-in outside distribution channels for its companies and members.  

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6 Ways Groups can Benefit from Crowdfunding

This is a guest post by Kiran Lingam, a corporate and securities lawyer and regular writer and speaker on crowdfunding and the JOBS Act.   

Existing business organizations (like TiE, AAPI, Entrepreneurs Organization, MIT Enterprise Forum, NASABA, NAPABA, CEO Council, AAHOA and ATDC), meetup groups (like New York Tech Meetup) and other communities could benefit greatly implementing a crowdfunding platform (like SeedInvest Groups) within their organization for several reasons:

1.  Support the Mission.  Most groups are organized around a common cause or purpose.  Crowdfunding can help pool resources and support new ventures that propel this cause forward.  For example, AAPI’s mission to facilitate and enable Indian American Physicians to excel in patient care, teaching and research and to pursue their aspirations in professional and community affairs.  This mission would be furthered by helping to fund a medical device that helped physicians provide better care.

2.  Increase Engagement & Enthusiasm.  Crowdfunding campaigns are short periods of intense action, creating a lot of excitement.  Members will be more engaged on a day-to-day basis with causes to rally around.  This will strengthen the relationships among members, thereby building up the internal binding of the organization.

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Crowdfunding and the Rise of the Super Angel

This is a guest post by Kiran Lingam, a corporate and securities lawyer and regular writer and speaker on crowdfunding and the JOBS Act.  

With crowdfunding, an angel investor with a good reputation could now have 10-20x more buying power.  Imagine that a prominent angel investor (a Super Angel) that you follow and admire (e.g. Sig Mosley, Charlie O’Donnell, Stephen Flemming) puts $50,000 of their own money into a young startup.  Personally, I would be happy to put down a small amount alongside them without any significant research or due diligence and I expect that many of their followers feel the same way.

Here are some potential results of this dynamic:

• A Super Angel, with a relatively small commitment like $50,000, would now have the ability to bring up to $1M of additional funds in through crowdfunding.
• The Super Angel would have much better bargaining position, and may be able to leverage benefits previously unavailable to angels (e.g. board seats, Series A style protections, protective provisions, higher valuation).
• Individual crowdfunders would be relieved of fraud worries, due diligence efforts, and transaction term negotiation.
• Super Angels will be measured on their performance, similar to how fund managers are measured today.  Those with the best performance would attract more crowdfunding co-investment.  Tools may emerge on funding portals or separately to measure angel investor performance.
• The need for venture capital in the $1-$2 million range may be more limited.  VCs may go later stage or become Super Angels themselves (but see Mark Suster’s post on the signaling problems this creates)
• Under certain circumstances, the Super Angel may be able to draw certain fees for these services.  We’ll talk about this in an upcoming post.

The extent of the applicability of the above scenarios depends on the SEC’s interpretation of JOBS Act, Section 302(b), amending the Securities Act of 1933 by adding Section 4A(g) stating that “Nothing in this section or section 4(6) shall be construed as preventing an issuer from raising capital through methods not described under Section 4(6).” 

This language may mean that a Reg D offering and a crowdfunding offering could occur simultaneously and without integration, but we’ll need clarification on this from the SEC.  If this turns out to be the case, then we’ll also need to understand how general solicitation under Reg D is treated while there is a simultaneous crowdfunding offering (advertising is prohibited for crowdfunding and crowdfunders may see the advertising of the Reg D offering to accrediteds).

At a minimum a Super Angel could use crowdfunding to fill out a $1 million total round using solely the crowdfunding exemption.

What else? What other effects on angel investing do you foresee as a result of crowdfunding?

The information on this blog is not a substitute for professional legal advice. The opinions expressed herein are the solely the opinions of the author and not of any law firm, employer or organization affiliated with the author. Nothing in this blog shall create an attorney-client relationship, nor is it a solicitation to offer legal advice. If you ignore this warning and convey confidential information in a private message or comment, there is no duty to keep that information confidential or forego representation adverse to your interests. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your rights.

Drive Revenue, Customer Development Through Crowdfunding

This is a guest post by Kiran Lingam, a corporate and securities lawyer and regular writer and speaker on crowdfunding and the JOBS Act.  

One of the biggest advantages to raising funds through kickstarter is the potentially broad community of backers formed around the fundraising campaign.  These backers create an instant base of potential beta testers, early adopters, customers, suppliers, evangelists, and twitter followers (and retweeters).

New and established companies should consider how crowdfunding can be used to generate revenue (as opposed to investment).  People who have skin in the game, even a small amount, are much more likely to be loyal customers, give valuable feedback, refer you to new customers, and help the company in countless other ways.

Here are some scenarios that we could see playing out:

1)  Growth Stage Startups: A startup like Birchbox with over 100,000 subscribers closes a $25 million Series C financing round.  It then allows each of its customers the opportunity to participate in a $1M crowdfunding follow-on round on the same economic terms.  Their current customers would be thrilled to have the opportunity to participate in the upside of the Company and, with skin in the game, would be more likely to recommend the product to their friends, give feedback, and help the company.  More people would want to become customers in order to be part of the “club.” Also, because this would be a follow-on to a venture backed investment, many of the concerns about fraud are minimized.

2)  Local Franchise Businesses:  A local business like Vezzo allows everyone within its zip code to participate in a crowdfunding round for purposes of opening a new store.  Local investors will become local customers and evangelists and suddenly the pizza stores have hundreds of new local people financially incentivized to promote the new and current pizza stores.

3) Early Stage Startups Requiring Critical Mass:  Some businesses (particularly social media) don’t work without a critical mass of users (see facebook, twitter, foursquare, quantia MD, quora, lawpivot, etc.) to create network effects.  Even if a company is capable of raising money through the traditional angel or VC route, it may actually prefer to go with a crowdfunding round in order to gain access to this potential early user base.  After a successful crowdfunding round, the company would be able to tap into hundreds or thousands of early adopter types with skin in the game, forming the necessary critical mass.

4) Early Stage Startup Customer Development: One of the key tenets of Steve Blank’s customer development principles is to get customer validation prior to going through the expense of creating a product.  You would do this through surveys, landing pages, mock screen shots, and letter of intents where potential customers agreed to be early users.  Getting a customer to invest in a product before it is created may be the best way to validate the product before it is created and will be a great indicator on whether a customer would buy, or at least try, a product once created.

The feasibility of each of these scenarios is highly dependent on the rules that the SEC ultimately comes down with on what can be contained in a crowdfunding notice and how it may be delivered.

What else?  How else could crowdfunding be used to generate revenue?

The information on this blog is not a substitute for professional legal advice. The opinions expressed herein are the solely the opinions of the author and not of any law firm, employer or organization affiliated with the author. Nothing in this blog shall create an attorney-client relationship, nor is it a solicitation to offer legal advice. If you ignore this warning and convey confidential information in a private message or comment, there is no duty to keep that information confidential or forego representation adverse to your interests. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your rights.

58% Highly Interested in Early Stage Equity Investments

A new study conducted by EarlyIQ, the Crowdfund Professional Association (SeedInvest sits on the Executive Committee) and Crowdfund Capital Advisors has just been released, bringing with it some very encouraging statistics. The first national study of its kind, the study was an online survey of 480 respondents nationwide (with a minimum of $25K annual income), and found that 58% of all respondents indicated a high interest in early stage equity investment.

This figure was obtained by the fact that when asked to indicate their level of interest in equity crowdfunding on a scale of 1 to 10, 58% were in the range of 7 to 10. 22% fell into the 1 to 4 category, which meant little or no intent, 20% chose 5-6, which meant they were unsure. The survey also found that investors were likely to make two to three investments annually, giving on average slightly under $2,000 towards each investment. SeedInvest advisor Jason Best remarked, “The passage of the JOBS Act was a key milestone for democratizing capital in the US. This research demonstrates the broad appeal in middle-America and we believe demonstrates a mandate rollout of equity crowdfunding in the US.”

While we are excited about the public’s enthusiasm towards crowdfunding, perhaps the most important fact to consider from this study is that investment intent quadruples overall when a neutral third party provides review of the management team. When respondents who were likely to invest and had an annual income of over $75,000 were presented with a company of which they had no prior knowledge, 68% said they would invest only with third party information, with a further 16% saying they would invest even if there was third party information of a similar company but none of the target company itself. 

When compared to the 22% who would invest with no prior or given information, this is a concrete affirmation of the importance of crowdfunding portals for both ends of the deal. With transparency of the management team found to be the greatest concern of likely investors in this survey, crowdfunding portals play an important role in mediating the exchange to ensure investors have access to comprehensive information. The sentiments of those surveyed are best summed up by comments such as “I’d want to see the business plan. I’d want to learn as much as possible about the principals” or “I would like to see a business plan and know exactly they are going to use the money for (equipment salary etc.)”. The study cites the fact that about 25 to 30% of investment comes from those who are first degree associations of the company, which means that 70 to 75% would have to come from those investors they didn’t already know.

Providing great insight about investor intention and priorities, the survey also sheds light on the direction in which the industry of crowdfunding is taking. With the advent of crowdfunding facilitators in the past year, we’re hoping that business will flourish as those services will meet a very real demand.

- Andrea

Crowd Funding Friday

This Friday, SeedInvest CEO Ryan Feit will take part in a panel on crowdfunding at AlleyNYC. The panel, which will address several issues pertaining to crowdfunding and capital formation, will also feature Rob Leclerc, co-founder of Exploration Funder and Kiran Lingam, a corporate and securities lawyer at King & Spalding LLP. Both bring with them immense knowledge and experience: Leclerc’s combined expertise in entrepreneurship and science is demonstrated in the work of Exploration Funder to give greater access of capital to small natural resource exploration companies, and Lingam’s close involvement with SEC and FINRA makes him an authority in all legal matters relating to equity crowdfunding. Learn more about how to get involved here.

A Secondary Market for Crowdfunded Companies?

SeedInvest was very encouraged by the recent recommendation of the SEC’s Advisory Committee on Small and Emerging Companies to establish a secondary market catering specifically to small businesses and startups.

The exact language of the recommendation is as follows: “The U.S. Securities and Exchange Commission should facilitate and encourage the creation of a separate U.S. equity market or markets for small and emerging companies, in which investor participation would be limited to sophisticated investors, and small and emerging companies would be subject to a regulatory regime strict enough to protect such investors but flexible enough to accommodate innovation and growth by such companies.”

More specifically, this separate secondary market would only be open to accredited investors who would be able to trade shares in startups and small businesses. Such accredited investors, meaning those who have a net worth, excluding their homes, of $1 million or more or income of $200,000 or more for at least two years, would be protected under added security measures, while the startups and small businesses would be encouraged to participate due to the lower costs of offering shares.

This could be a boon for crowdfunding since liquidity, meaning the ease of converting assets to cash, is often challenging for investors in private businesses. As SeedInvest CEO Ryan Feit explains in this Crowdfund Insider article, the creation of a secondary marketplace helps both investors and businesses get around that issue:

“One of the largest risks to investing in startups and small businesses is the inherent lack of liquidity. Although we advocate for an exchange which is open to everyone, any new secondary market which provides an additional avenue for investor liquidity is a significant net positive.  More liquidity means more capital for private companies which means more job producing startups and small businesses.”

As the Crowdfund Insider article mentions, crowdfunding portals like SeedInvest can be part of this secondary market by allowing investors to buy and sells shares of startups and small businesses on those portals. Although it is easy to criticize the exclusivity of who can invest in the secondary market as something that will further hinder the imbalance of investor opportunities, one can argue that this is a constructive step in helping new businesses gain access to capital.

Andrea 

We’re Up There

Given Forbes’ designation of SeedInvest as one of the “leading players in crowdfunding” a few weeks ago, it may not have come as a surprise that SeedInvest was included on the list of Top Contenders in 2013. We’re honored to be mentioned and will continue running hard to hopefully meet and exceed the lofty expectations placed on our platform. We will also continue to serve as thought leaders in the space in order to ensure, to the best of our ability, that the JOBS Act is implemented in the best matter for both entrepreneurs and investors.

On that note, earlier this week, yet another decisive step towards legalization was made when FINRA asked prospective crowdfunding platforms to file “funding portal forms.” SeedInvest CEO commented on the matter on behalf of The Crowdfund Intermediary Regulatory Advocates (CFIRA). “As a funding portal we see the request for information in a very positive light,” says Ryan Feit, the CFIRA Funding Portal Subcommittee Chair and Founder of SeedInvest. “Crowdfund Investing by nature brings transparency to the capital raising process.

As an industry we are happy to be transparent by providing FINRA with the information they requested.” We still have a lot of work to do both on the business and regulatory fronts, but SeedInvest will have a very exciting few months ahead so stay tuned.

What the Future Holds

We won’t question Deloitte Canada when they say that PCs will still be relevant and that mobile advertising will expand in 2013, but where we’re really paying attention is their annual TMT forecast that crowdfunding portals will “double their haul from 2012.” As described in this Financial Post article, Deloitte notes the success of Kickstarter, through which over two million backers pledged over $320 million, as being an indication of crowdfunding’s popularity to come. And yes, we have stated before that there is a difference between crowdfunding portals like SeedInvest and Kickstarter, but that doesn’t change the fact that people are looking more and more to the public as a means of raising capital. With changes in the SEC leadership and the momentum of awareness-building programs still strong from last year, the creation of a legal framework for crowdfunding in the United States is well on its way to materialization. And, with David Drake naming us one of the leading players in crowdfunding today, you can say that we’re hugely optimistic about what 2013 will bring.

Financing your startup with SeedInvest

SeedInvest will open the exciting new year with the event Financing Your Startup with Equity Crowdfunding, hosted by The Indus Entrepreneurs (TiE). As part of the TiE Bootstrap Series, SeedInvest CEO Ryan Feit will be appearing on a panel alongside serial entrepreneur David Rose of Gust.com and Sara Hanks of CrowdCheck, where they will discuss how entrepreneurs can take advantage of the growing number of crowdfunding platforms. With Ryan’s expertise in crowdfund investing, David’s reputation as “the father of angel investing” and Sara’s 30 years of experience in the field of corporate and securities, the panel is sure to provide a comprehensive view on the best approaches to getting started. More information on how to get involved can be found here.

SeedInvest Co-Hosting St. Louis Crowdfunding Seminar

On Wednesday December 5, SeedInvest will be partnering with SoMoLend to host the St. Louis Crowdfunding Seminar at Washington University, where small business owners and investors are encouraged to attend.

In addition to an introduction to crowdfunding and discussion panel by SoMoLend’s Candace Klein, the Seminar will also include a consultation and mentoring session by the partnering companies, and attendees will get a chance to network.

Those with a competitive streak can also take part in the St. Louis SoMoLaunch Business Competition, where small businesses can enter for a chance to win $1,000 to fund their business. 

On Your Reading List

If you’re eager to learn more about crowdfunding but haven’t yet been able to attend the many conferences and events that bring crowdfunders and business people together, you’re in luck. SeedInvest advisors Jason Best and Sherwood Neiss, along with their Startup Exemption co-founder Zak Cassidy-Dorion, have jointly written Getting Started with Crowdfund Investing for Dummies in a Day®, an abbreviated version of which was released this Tuesday and is now available on Kindle and Nook. The complete version, which will come out in March, will cover the details of crowdfund investing and how investors can facilitate the role of crowdfunding in the economy. But for those who just can’t wait to get their holiday reading started, this shorter version will take a greater focus on the entrepreneurial aspect, with chapters on Financing a Startup or Small Business, Picturing Your Crowd and Working with an Online Investing Platform, to name but a few. The book tour hasn’t kicked off yet, but for us the prospect of electronic signatures on our Kindles is still pretty exciting.

Andrea 

New Leadership, Renewed Hope

While the nation voted to keep President Obama in office for a second term, things will look differently at the top of the Securities and Exchange Commission (SEC) starting next month. Yesterday, President Obama stated he intends to appoint Elisse Walter as the new Chair of the SEC following the announcement of current Chair Mary Schapiro’s stepping down, which will take place on December 14.

With the implementation of the JOBS Act and its regulations in sight, Walter has a rather large torch to carry, but many are optimistic about her leadership. According to Karen Kerrigan, the head of the Small Business and Entrepreneurship Council, Walterrepresents a change of pace in the SEC with regards to crowdfunding, which she observes as not having been so keenly embraced under Schapiro’s direction.

“Perhaps new leadership – even if it is an interim leader – will breathe some enhanced productivity and energy into the SEC’s work,” Kerrigan said. “At the staff level, the SEC is very engaged on JOBS Act provisions, and with the right signal and leadership I think the process can accelerate.”

Candace Klein, co-chair of the Crowdfund Intermediary Regulatory Advocates (CFIRA),agrees that Walter will be a constructive force for crowdfunding: “We think she will be a very strong person in this position. Commissioner Walter has been open to listening to the industry, she has been willing to meet with us, and we’re excited to work with her. This is very positive for us.”

Walter’s credentials also lend themselves to confidence by many with regard to her potential on the job. Having served as commissioner at the SEC, as senior executive vice president for regulatory policy and programs at the Financial Industry Regulatory Authority (FINRA), and the same position at FINRA’s preceding organization, the National Association of Security Dealers, Walter has ample experience in the regulatory process.

At the SEC Government-Business Forum on Small Business Capital Formation earlier this month, Walter expressed confidence about the SEC’s ability to fine-tune the pathways for both greater investor security and small business benefits:

“People often frame this discussion as “balancing” the desire for easier capital formation against the need for investor protection. But I see this as presenting a false choice, and I hope that you do as well. A vital prerequisite to efficient capital formation is a market in which investors have confidence. If allowing general solicitation results in increased incidence of fraud or sales of securities to investors that do not have the sophistication to understand the risks and merits of a particular investment, we will have failed not only investors, but small businesses as well. In other words, regulations that protect against these risks — without placing undue burdens on businesses — will benefit all participants in the capital markets. On the other hand, we should not block this change because we are afraid that harm will result; it is the responsibility of regulators (and market participants as well) to determine how to obtain the benefit of the change while safeguarding against the downside risks to investor protection and the public interest.”

A close follower of Schapiro during her years at the SEC and FINRA, Walter is not expected to deviate much from her predecessor’s modus operandi in the larger context of the SEC’s work. However, with a renewed enthusiasm for the potential of crowdfunding, Walter presents a promising new chapter in the field, and we hope that much will be achieved before her term ends in December 2013.

Andrea

This Is Not Kickstarter

When explaining the concept of equity crowdfunding to the uninitiated, their first response may well be, “Oh, like Kickstarter?” 

While Kickstarter may be a good point of reference for the idea of equity crowdfunding via Internet portals, the two models are vastly different. Kickstarter promises rewards for successful projects in the form of anything that is not monetary, whereas equity crowdfunding, as its name suggests, promises a financial slice of the pie when it comes to startup and small-business investment. As a result, the average amount raised on Kickstarter is approximately $5,000 whereas equity crowdfunding will yield much larger funding amounts. When significantly larger dollar amounts are at stake, investor protection plays a much larger role, as explained in this Forbes.com article. This is not to say that Kickstarter is not concerned with the security of its backers, since all projects are screened rigorously before being eligible for funding, but that when it comes to a more long-term relationship between investor and entrepreneur, heightened regulation for equity crowdfunding is necessary.

Kickstarter is also a platform for mostly creative and artistic endeavors, where often simply the excitement behind supporting an original idea is enough to justify the contribution. Getting their hands on a new product early or a shout-out on film credits is enough for backers although they have zero opportunity for a financial return. In an AllThingsD.com article, Kickstarter CEO Perry Chen said, “People are supporting projects because they want to see them happen. It’s so different than giving money because you want to make a profit.” As a result, Kickstarter has publicly said multiple times that it will not enter the equity crowdfunding space.

Creativity in equity crowdfunding should not be thought of as taking a back seat, but when profitability comes into play, investors will likely make more informed decisions, leading to more sustainable business ventures. Remember that in a recent survey, the CFPA found that 20% of investors surveyed said that their main motivation was to be part of something bigger than themselves, which is testament to the fact that investors are not merely investing based on returns.

Differences from Kickstarter aside, there is one other commonality, which is that crowdfunding, whether rewards-based or equity-based, aims to serve those who have great potential but are unable to get the attention of the big players. Both espouse the philosophy that ideas should not fall by the wayside just because the entrepreneurs don’t know the right people or have ready access to capital. Both models leverage the Internet to democratize access to capital by allowing large audiences to support new ideas and businesses. Thus, no matter the motive behind pitching in, crowdfunding can be said to be one of the next big drivers of innovation.

Andrea

SeedInvest Back in DC with the SEC Next Week

At the 31st Annual SEC Government-Business Forum on Small Business Capital Formation on Thursday November 15, SeedInvest will join other CFIRA leaders in meeting with the SEC, which is currently regulating the process of Crowdfund Investment. The forum will begin with panel discussions on the implementation of the JOBS Act and what kinds of small-business capital formation it covers, and will be webcast live on the SEC’s website. Afterwards, there will be afternoon breakout groups to discuss specific policy recommendations, which will be open to the public and accessible by teleconference, but will not via webcast.

As stated on the SEC’s website, “A major purpose of the Forum is to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection.” Amassing a considerable entrepreneurial presence, not just members of the CFIRA but other small businesses, investors, VCs, lawyers, and other crowdfunding advocates is hugely important in ensuring that the concerns of startups and small businesses will be reflected in the rulemaking process.

Andrea