Investment-Based Crowdfunding

PubVest Racers

As a result of the recently passed JOBS Act, it soon will be legal for startups to accept investments online.  This represents two major changes from the status quo:

1.  Startups will be able to raise money from all Americans—not just wealthy friends/family/angels and venture capitalists; and
2.  Startups can raise capital without knowing their investors personally.  (Under current law, in order to get money from an angel or a VC, you have to be acquainted first.)

This will create unprecedented opportunity, both for entrepreneurs and for ordinary investors who have been forced to sit on the sidelines.

Once the new law goes into effect, startups and other private businesses can go directly to the public to raise seed capital.

As your company grows, investment-based crowdfunding can provide a bridge between institutional rounds.  It will enable entrepreneurs to raise more money at lower cost—and with fewer strings attached (board seats, control provisions, and the like).

One of the most exciting applications of this new rule is that startups can accept investments from their customers.  If anyone can see the long-term value in your company, it’s your early adopters.  Allowing customers to invest makes them “stickier” to your brand, more likely to stay loyal and spread the word.  So investment-based crowdfunding isn’t just a financing strategy—it’s also a smart marketing strategy.

And it can be a smart complement to institutional capital. There is definitely a value to experienced professional investors. At their best, VCs can offer great advice and contacts. But there is also a value to adding investment-based crowdfunding: lower cost capital, less dilution, more control, and terrific sales and marketing benefits.

If you’re interested in raising money for a startup using investment-based crowdfunding, you should proceed with caution. Securities law is no joke–and what you don’t know can hurt you.  That’s why it’s important to work with experts who can shuttle you through the process in a safe, professional way.  Beware of anyone who tells you that it’s easy; and think long and hard before you take advice from someone who doesn’t have a background in law or the capital markets.  The paradigm is much closer to Morgan Stanley than Kickstarter.

My colleagues and I think the opportunity is so big that we founded a company to help entrepreneurs raise capital using these new tools.  It’s called PubVest (check us out at www.pubvest.com).

One question we’re often asked is, what’s required of a company seeking this kind of funding? We won’t know everything until the SEC finishes writing its rules, but we have a pretty good idea.  It’s basically the same disclosure that a smart institutional investor would require–a solid business plan, the name of officers, directors, and 20%+ shareholders, financial statements (that have to be audited if you’re raising more than $500,000), a description of the company’s existing capital structure as well as how the company intends to use the new money it raises.

Our team would be delighted to chat with Columbia students and alums interested in raising capital.  We especially like working with businesses that seek to do well for their investors while also doing something good in the world.

Even though the JOBS Act has been passed and signed, it won’t go into effect until that SEC rulemaking is finished (at some point this year).  In the meantime, we’re happy to answer any questions about what investment-based crowdfunding might mean for you.

 

 

Adam Kaufman CC’04 is CEO of PubVest. You can contact him at adam@pubvest.com.