• Aug. 19, 2017, 9:00 pm

The evolution of the equity-based crowdfunding discussion

One of the interesting perspectives you get when reading and curating stories for a website is following the momentum of any topic.  How many people are talking about it?  When did they start?  Who specifically is talking about it?

Tracking the length of time that a topic is heavily discussed is like following a song on the Billboard charts.  The longer it lasts and the higher it rises collectively gives a good idea of how people view its importance.

A topic whose momentum has been building over the last year is equity-based crowdfunding.  While it did not just pop up out of thin air last year, equity-based crowdfunding was taken a lot more seriously in wider circles around this time in 2013.

The discussion started under a cloud of conjecture.  How would the government deal with it?  How far would the JOBS Act go? Would the public buy into it?

Ryan Caldbeck

Ryan Caldbeck

The void equity-based crowdfunding could fill was neatly summarized in an article last January by Amy Cortese of the New York Times.  She profiled Circle Up’s Ryan Caldbeck, who described his motivation for starting the company.  In mid-2012 Mr. Caldbeck was part of a conference panel when he was asked by an audience member where a company with only a few million in sales could go for help with expanding.  “We had no answers,” he told Ms. Cortese.

Investors and institutions will seldom touch a consumer goods company until it reaches $10 million in sales.  Given that a panel of experts had no answers for the entrepreneur, it was a sure sign that a void existed, leaving Mr. Caldbeck with the impetus for Circle Up.

Whatever guidance the SEC was going to provide was stuck in the gates following former chair Mary Schapiro’s resignation late in 2012.  They took their time naming a replacement.  In the interim those desiring clarity, from thousands of entrepreneurs all the way up to Slava Rubin, worried the feds would kill equity-based crowdfunding before it had a chance to get going.

Aside from killing the strange-looking goose that could conceivably lay the golden egg, many fears tended toward the government playing on both teams by, yes, allowing equity-based crowdfunding but making it so cumbersome as to be useless.

Others centered around the work of lobbyists, academics and consumer groups opposed to the concept who could have, at minimum, delayed the process or killed it all together. Any delay would undoubtedly result in missed opportunities and, in some cases, failure. Other businesses would either be in a holding pattern waiting for the new rules, or erasing months of preparation if the lobbyists had some influence and they had to perform an about-face.

Predictably, early on there were naysayers who mixed some real concerns with red herrings in an effort to dissuade people from giving the concept serious thought. One detailed five reasons why equity-based crowdfunding under the JOBS Act would not work.

The first was the low limit – $1 million at the time – that the writer felt would not make it worth the while of many companies.  To prove his point he cited a tech company.  He might as well have said NASA, for tech companies need intensive amounts of funds at an early stage in the process.

The writer acknowledges that “mom and pops”will find that as a good amount of money. Are tech companies all that matters?

In the past year I spoke with many in the crowdfunding industry, including operators of many startups, who saw the $1 million mark as more than enough, with several reminding me that it could be accessed once per year as needed.

I also spoke with API developers and real estate people who would not even look at equity-based crowdfunding because of the amount. Overall it was best left for tangible product developers and small business formats, which will be key players in America’s economic renewal.

Fortunately the industry received an early Christmas present from the government called Regulation A+, which raised the limit for Tier Two offerings to $50 million. Problem solved.

SECThe second reason was a complete red herring. It will be incredibly difficult to manage hundreds or even thousands of investors, he reasons, going so far to ask how to handle $100 investors who want constant treatment. I do not know of too many people who have that kind of time on their hands to spend their time doing this. In the case of the few outliers, there is not a business alive that does not need to develop the ability to deal with cranks. Retirement and investment plans rely on funds from thousands of investors and somehow manage to communicate effectively with them.

The third worry was compliance costs that would be too onerous for companies raising smaller amounts. The SEC recognized this and made it less complex for companies dealing with those lesser sums.

Related to that was  legal costs and, wouldn’t you know it, companies sprouted up that address that need. Look what happens when you create opportunity for small business.

The fifth reason was pure ignorance – who would want to invest in a crowdfunded company? The last year has answered that.

As theory moved closer to reality we began seeing those who have been preparing for this time along with those dreaming about where equity-based crowdfunding could go. The possibilities for open source companies seemed limitless, Fred Trotter wrote in late March. Open sourced companies in areas like software, hardware and bioware could safely hone their product, having to only answer to a community more likely interested in purely the product and not other areas. Capital is the only thing separating the most promising companies from being the next Apple or Oracle.

mary_jo_white_300

Mary Jo White

Clarity at the top of the SEC was achieved in early April when Mary Jo White was confirmed as its new Chair. Despite the efforts from some on the left to label her as sympathetic to banks and banking interests because she defended Bank of America in fraud litigation, she is held in high respect by most, gaining respect for her prosecution of terrorists and organized crime.

The association with the banks should be seen as a plus, Massimo Calabresi argued in Time when Ms. White was nominated in late January. “Most important, she’s seen the banks naked,” Mr. Calabresi wrote. By knowing how they truly function she would be able to craft legislation which is more likely to address the most important factors in that particular area.

When the heavy hitters start spending their time and money on something, it is a sure sign it has legs. In April it was announced Naval Ravikant was opening up AngelList Invest, an equity crowdfunding service that had been successful in a limited trial run by invitation only. AngelList Invest would soon be available to “top-tier” accredited investors and companies which had already secured at least $100,000 from such an investor.

The progress was welcome because the environment at the time was a deterrent for some industries, including many technology-related ones from even developing ideas, never mind going public.

When the person making those comments is Marc Andreessen, people pay attention. In a May interview with CNBC Mr. Andreessen felt that the dot-com crash spawned an era of over regulation which dissuades companies from even considering going private (Boy I hope the banking executives don’t read this). Companies with novel and unconventional ideas will be cut off from the vital funding sources that could be funding the next wave of successful tech companies.

Over the summer we were reminded that it is not just the United States that is deciding what to make of this equity-based crowdfunding business. In July, Italy enacted the world’s first equity crowdfunding law.  The Decreto Crescita Bis mandates that professional investors and CONSOB-registered firms must own at least at minimum a five percent stake in any crowdfunded company after the offering is completed.

As 2013 came to a close we were left with the good news of Regulation A+.  Everyone in the crowdfunding industry now awaits the final report so they can move forward with 100 percent confidence.

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