More on the Jumpstart Our Business Startups (JOBS) Act.
As you probably all know by now, the JOBS act legalizes Crowdfunding for small businesses, and before it becomes law in February of 2013, the SEC has several months to craft specific rules around the bill and the ways in which investors and entrepreneurs can work within the framework to invest in and fund their companies. Among the purposes described as the impetus behind the passage of this bill were the creation of new jobs, the easing of access to capital for entrepreneurs, and the inclusion of everyday Americans in an opportunity to own part of the next Facebook or Google.
Those of us with vested interests are hoping of course, that the SEC capitulates with the majority interest and creates an exception to the rules that govern the investing in and trading of securities, creating essentially a broker-dealer-light path to handling these funds and reporting for compliance purposes. This might mean that these platforms would have to register as broker-dealers, but that they might be exempted from the larger fees and more stringent oversight required of a traditional BD like a Charles Schwab, for example.
In our view, the rules should be in alignment with the amount of money being placed at risk. In this case, we will probably be limited to $1 million per deal, and individual investors will probably be limited to $10,000 or 10% of their annual salary per deal. The requirement for advice should also be limited in terms of liability, as the platforms would only be offering a common investment vehicle through which an individual investor may take an equity position and would not be in any position to recommend or warrant the investment in any way.
The new Crowdfunding rules should also apply evenly to online platforms seeking to create a lending marketplace for investors who are interested in spreading their risk by lending say, $10,000 across a multiple of loans in say, $50 increments. The only difference in this example is that instead of taking an equity position in several companies with their $10,000, the investor would be expecting to be re-paid their $10,000 loan with principal and interest over time. Similar to Crowdfunder’s model.
So, which existing sites are best positioned to benefit from the implementation of the JOBS act, and which were designed to serve the markets the bill intends? And, where will all of these potential investors go to shop for deals?
Kickstarter, though perhaps the earliest US entrant into the space may not decide to jump into the equity share space at all. They have been so successful as a platform that lets makers of things like video games, magazines and quirky products raise money, they might opt to not change a thing. Kickstarter backers don’t receive a financial stake in the projects they fund, but instead get other incentives and rewards, like a tee-shirt or a coffee mug or a copy of the book they funded.
The company has repeatedly declined to comment to media outlets on the effect the JOBS Act will have on its business, so who knows?
Crowdtilt is one of the buzziest companies to emerge from the latest crop of startups at incubator Y Combinator. The brand-new Crowdtilt focuses on “groupfunding”, which is to say, private projects among people who already know each other. Friends can raise money for a common goal, like a week at a beach house, a wedding gift or a community gardens. Crowdtilt founder James Beshara has said on numerous occasions that he’s not sure if the company will expand to offering equity.
AngelList is a play that connects startups with a roster of high-profile investors and entrepreneurs. It is positioned to enter the space as it already connects more than 110,000 potential angel investors with entrepreneurs seeking funding. They could instantly create a funding COSTCO, but several investors have recently quit the site claiming they were turned off by the herd mentality and the focus on hype. Just what the space doesn’t need.
Crowdfunder has been an active backer of the JOBS Act, since its entire business model is illegal until the legislation kicks in. The company was founded in November (just like iPeopleFINANCE), right after the House passed its version of the bill, HR2930.
Their founder (Chance Barnett) says he started Crowdfunder in order to give startups more options. Backers can choose to invest for more than just straight equity — they could also buy a cut of revenue based on time or percentage return. So an investor could buy 5% of a company’s revenue for three years, or 10% of revenue capped at a 200% return on their investment.
“In equity-based financing, [investors] aren’t guaranteed a return on their money unless the company is sold or offers dividends,” Barnett says. “Revenue lets them get a return. It lets them really share in the incremental growth of a company as it happens.”
Mike Norman says he created Boston-based WeFunder “specifically to respond to the new opportunities the JOBS Act provides.” Norman and his three cofounders are alums of other startups including SoChange, Smartcloud and Crowdly. Lot of Crowd-stuff here.
WeFunder has been running a private beta test, through which nearly 3,800 backers have pledged almost $9.2 million in Monopoly money to startups, the site claims. But until the new laws kick in, that’s all silly, or beta or meta. No actual cash can legally change hands.
Indiegogo is part of the old guard in the CrowdFunding space, at the ripe old age of four. The company says it’s “the world’s largest global funding platform.” Projects can raise cash for pretty much anything they want. Past projects range from a woman’s fundraising campaign to pay for in-vitro fertilization to partial funding for the movie Bully, which was later picked up by the Weinstein Company. In a very pioneering move, back in 2009 Indiegogo created a campaign called “Crowdfunding Campaign to Change Crowdfunding Law” — seeking changes similar to those the JOBS Act provides. Still, their founder has made no commitment to entering his site into the game.
Austin-based MicroVentures is an online peer-to-peer investment marketplace. It helps accredited investors pool their cash together in syndicates and get access to startup funding opportunities that aren’t usually available outside of the traditional venture capital network.
As the law sits today, they are limited only to accredited investors — that is, investment funds and individuals with a net worth of at least $1 million. The JOBS Act could let MicroVentures expand to accept investments from anyone (who qualifies to the lesser extent described above) who wants in. MicroVentures is a registered broker-dealer. That means it’s required to perform due diligence and provide investors with detailed information about the companies on offer. CEO Bill Clark says “he’s still deciding” whether to get in. “It’s not clear yet what our risk would be,” he says. “We have to be very selective, because if a bad deal goes through and due diligence would have caught it, then we’d be on the hook.” Clark estimates that a startup could spend at least $5,000 to get its financials audited, and setting up escrow for the investment funds run another $3,000 to $5,000. MicroVentures today, pays those costs for startups “because we understand they don’t have the money yet,” Clark says. Whether they want to expand their portfolio at the scale the new JOBS act allows is anyone’s guess.
Finally, iPeopleFINANCE is set to launch their site in September of 2012, initially as a pure lending platform targeted to those individuals who are currently underserved by the traditional banking establishment. Everyone who becomes a member will be given a free debit card with mobile cash transfer applications to use as a banking vehicle. In addition, small businesses will be able to get loans and/or investments by individual lenders and investors qualified the same way as the JOBS act requires.
iPeopleFINANCE is a broker-dealer and a registered investment advisor, so it will be in a position to advise customers on the risks involved with the various investments. The difference is that iPeople also provides a personalized credit score that will consider one-time blemishes such as those caused by mortgage defaults, as well as thin-file applicants (those without any credit history), returning veterans of the Iraq and Afghanistan wars and tuition-loan strapped college students looking for financing assistance from alumni.
iPeople’s platform is perfectly positioned to take immediate advantage of the JOBS act implementation. It will be interesting to wee what happens. Stay tuned!