Building a Case for Crowdfunding

Sherwood Neiss is passionate about entrepreneurship. And he has helped lead the charge to change nearly 80-year-old federal securities laws about investing, so that entrepreneurs can gain access to capital.

Called crowdfunding, the changes will allow small investors to fund start-up businesses, hopefully creating jobs and boosting the economy in the process.

Earlier this month, while Neiss was in Dubai speaking at the Global Entrepreneurship Summit, we emailed him questions. Here are his edited responses.

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Making the Case for Crowdfunding: Q&A with Sherwood 'Woodie' Neiss

Sherwood “Woodie” Neiss is passionate about entrepreneurship. And he has helped lead the charge to change nearly 80-year-old federal securities laws about investing, so that entrepreneurs can gain access to capital.

Called crowdfunding, the changes will allow small investors to fund start-up businesses, hopefully creating jobs and boosting the economy in the process.

Earlier this month, while Neiss was in Dubai speaking at the Global Entrepreneurship Summit, we emailed him questions. Here are his edited responses.

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Canadian and U.S. Lobby Groups Forge Crowdfunding Alliance

The main organization lobbying to legalize equity crowdfunding in Canada is teaming up with a major U.S. group to bolster its efforts.

Invest CrowdFund Canada (ICC) announced today it is formally partnering with the U.S.-based Crowdfunding Professionals Association (CfPA). The new partnership – referred to as the CfPA/ICC National Canadian Board – will feature CfPA co-chair Sherwood Neiss as well as board members from ICC including ICC national chair Dr. Cindy Gordon and Fawn Annan, president and group publisher at IT World Canada (parent company of ITBusiness.ca). ICC will also represent Canadian crowdfunding legislative interests on the CfPA’s global board.

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Who Can Invest Once the Solicitation Ban is Lifted

Who Can Invest Once the Solicitation Ban is Lifted?

 

Who can invest in start-ups once the general solicitation ban is lifted? That’s the 64,000 dollar question – or to be more “inflationary precise”, the 540,963.63 dollar question.

 

I’d gladly relinquish the half million+ dollars for a different answer. Because even though the removal of the restrictive solicitation ban helps smaller issuers raise capital, it does absolutely nothing to benefit smaller investors. Once the new law is implemented, private companies will be permitted to advertise to the general population so long as they only accept money from accredited investors.  Soon, non-accredited investors will be able to view a television commercial for a hot private growth stock. Too bad they won’t have the capability of investing in it until after it goes public at an over-inflated valuation. This is about as cruel as forcing diabetics to watch Hostess Twinkie ads.

 

While the unions are helping to ensure that Hostess won’t be around to tease any more diabetics, who’s looking out for America’s retail investor?  Frankly, no one is. That’s why it is up to “We the People” to make sure that the investing public receives its fair share of growth opportunities. It is more than our responsibility, it is our right as U.S. citizens to voice our discontent and help effect legislative change. The accredited investor rule is not only unjust; it is exacerbating America’s wealth divide and impeding economic growth. Thus, it needs to be repealed immediately. Below is an excerpt from a recent article I published on the subject. The complete piece which be found at http://nowstreetjournal.com/2012/11/26/todays-america-nothing-ventured-everything-gained-at-least-for-some/

 

While America has made great progress eradicating religious, gender and racial persecution, it continues to allow discrimination based on net worth and income levels. Presently, only “accredited investors” – those persons possessing a net worth of at least $1M excluding the value of one’s primary residence or have annual income of at least $200,000 (or $300,000 together with his or her spouse) – are legally permitted to invest in private companies. Unaccredited investors are forced to wait until companies register with the SEC and begin trading on public stock exchanges.

 

20 years ago when companies went public as young emerging businesses, smaller investors weren’t put at a disadvantage by having to wait for an IPO in order to invest. In fact, 99% of Microsoft’s stock appreciation was realized after it had gone public. Conversely, by the time most of today’s companies go public, the bulk of their growth is long behind them. Case in point, 100% of Facebook’s stock appreciation was realized in the private markets prior to its IPO where only accredited investors were afforded the opportunity to partake in its dramatic climb.

 

Because new issue upside has been dramatically curtailed, today’s average public market investor is left assuming more capital appreciation risk than ever before. It sickens me to think about all of the middle class wealth that might have been created from September 2004 to May 2012 when Facebook grew from a mere $5M in market capitalization to its IPO valuation of $104B.

 

America desperately needs to reopen its financial markets and allow capital to flow back to its smaller investors and issuers. This is precisely what the Jumpstart Our Business Startups Act (the “JOBS Act”) was designed to accomplish. Even though it is one of the most economic restorative pieces of legislation in modern history, if you’re not reading political or financial trade publications, you’ve probably never even heard of it. And because it passed with an overwhelmingly bipartisan majority; the JOBS Act received limited main street media coverage. It is utterly shameful that the policies which divide us get more attention than the legislation that unites us.

 

The JOBS Act helps emerging businesses access capital by improving the “on-ramp” and making it easier for smaller companies to go public. And since, according to Forbes, small businesses generated over 65% of new jobs during the past 17 years, it is imperative that America’s capital markets serve as a conduit to small-cap funding, not as a barrier.

 

Unfortunately, facilitating the IPO entrance is simply not enough. The truth is, it is far less challenging for companies to become public than it is for them to stay public, particularly in a marketplace dominated by high frequency traders and inadequate aftermarket support. According to research conducted by David Weild IV, Head of Capital Markets at Grant Thornton and CEO of Capital Markets Advisory Partners, U.S. stock markets have lost 43.5% of all listed companies since 1997.

 

Without re-establishing an ecosystem to support companies being public at smaller valuations by enthusiastic investors as opposed to detached traders, the demand will never be strong enough to meet the supply in the marketplace. Hence, unless the “highway” is completely renovated, the public markets will remain dysfunctional.

 

The “Crowdfunding” component of the JOBS Act provides the most viable and democratic solution. Its community-style, social investing methodologies furnish built-in aftermarket support. “Crowdfund Investing” not only grants the 99% with the same investing freedoms as the 1%, it fortifies the relationship between investor and investment, encourages longer term investing principles and ultimately helps restore appropriate risk/reward ratios.

 

Although it was signed into law on April 5th, “Crowdfund investing” won’t be officially legal until the SEC implements the new rules (currently in the 270 day rulemaking period). Given its history of failing to meet deadlines, it is most likely that the SEC will far exceed its Government mandated January 1, 2013 deadline. We simply cannot allow this to happen, for as long as one class of citizens continues to receive superior investment opportunities and better investing odds, there will never be true equality in the United States.

 

Our nation will never collectively prosper if our capital markets remain prejudiced. I urge you to write your local legislators and insist that they hold the SEC accountable for implementing the overwhelmingly bipartisan JOBS Act in a timely fashion. Demand that legislation be introduced to remove the unconstitutional Accredited Investor Rule 501(a) of Regulation D under the Securities Act of 1933. The future of America is at stake. Don’t let it go down with the Twinkie.

 

Together we can bring equality to the capital markets and return them to the lifeblood of our economy: America’s small businesses and retail investors.

 

Dara Albright

Founder, Now Street Journal

Valuation, What is it? How to calculate it?

Valuation, What is it? How to calculate it?

So do you think that your company is the next LuLu Lemon, Skype, LinkedIn?  I know, you have an idea that is so unique and no one else will ever think of it or be able to compete!  We have all been there but when seeking capital to make your fantastic idea real, convincing the angel groups, venture capital firms that their money will be well spent is a big challenge that most entrepreneurs face. 

The investment trail can lead to a series of questions but the one question that seems to stump the most well thought out entrepreneur is, What is your companies valuation?  First, the entrepreneur gives a look like the deer caught in the headlights syndrome, then the laser quick $10m, $20m or the lean back in the chair “let me get back to you later” gurgles humbly from the lips.   

The short answer to the question should be a reply from the entrepreneur to the investor, “What is the investor asking about, pre-money or post money valuation?”  The truth is, knowing this answer will allow you the opportunity to provide the possible best answer because the answer differ based on the timing of valuation. Both pre-money and post-money are valuation measures of companies. Pre-money refers to a company's value before it receives outside financing or the latest round of financing, while post-money refers to its value after it gets outside funds or its latest capital injection. Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. Post money valuation, then, includes outside financing or the latest injection. It is important to know which is being referred to as they are critical concepts in valuation.

Let's explain the difference by using an example. Suppose that an investor is looking to invest in a hi-tech startup. The entrepreneur and the investor both agree that the company is worth $1 million and the investor will put in $250,000.

The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.

As you can see, the valuation method used can affect the ownership percentages in a big way. This is due to the amount of value being placed on the company before the investment. If a company is valued at $1 million, it is worth more if the valuation is pre-money compared to post-money because the pre-money valuation does not include the $250,000 invested. While this ends up affecting the entrepreneur's ownership by a small percentage of 5%, it can represent millions of dollars if the company goes public.

This topic gets very important in situations where an entrepreneur has a good idea but few assets. In such cases, it's very hard to determine what the company is actually worth and valuation becomes a subject of negotiation between the entrepreneur and the investors.

Usually, a company receives many rounds of financing (conventionally named Round A, Round B, Round C, etc.) rather than a big lump sum in order to decrease the risk for investors and to motivate entrepreneurs. Pre- and post-money valuation concepts apply to each round.

Crowdfunding, I Have Invested, What’s Next?

Crowdfunding, I Have Invested, What’s Next?

It’s 2013. The crowdfunding regulations are finalized and effective. You have invested in your first crowdfunded company and you are now officially an owner of that company. What’s next?

Traditionally, an investor’s role after they have invested in a company is determined by the amount and type of ownership the investor has in that company. Equity-based crowdfunding will likely change this, but not how you would expect. In most cases, crowdfunding investors will contribute collectively to fund up to twenty percent of a crowdfunded company. That fact coupled with the investment limitations set forth in the JOBS Act (the greater of $2,000 or 5% of the investor’s annual income or net worth if either the investor’s annual income or net worth is less than $100,000) will limit the size of each crowdfunding investor’s ownership in companies that utilize the exemption. By traditional standards, that would tend to indicate that the role of the investor will be quite limited. It’s a good thing that equity crowdfunding unshackles traditional investor roles!

Equity crowdfunding thrives on every crowdfunding investor playing a critical role in the success of a company regardless of how small the investor’s ownership amount may be. The role is not just a financial role, but also a spirited role that injects adrenaline into the crowdfunded company’s brand. Crowdfunding investors realize that they are playing a substantial part in jumpstarting a business. They aren’t investing $100 into a blue chip company like IBM or Coca-Cola. Their investment is quite different because the crowdfunded company depends on their support. Further, the investors’ vigor and representation of the brand will strengthen the crowdfunded company’s chances of becoming that blue chip company.

Another way for a crowdfunding investor to contribute to their new company’s success is to let the company’s employees work hard to get them a return on their investment. Investors want the entrepreneurs to be busy driving their business forward as opposed to managing hundreds and hundreds of crowdfunding investors. The best way for a crowdfunding investor to participate in generating a return on their investment is by actively promoting the companies that they have invested in. The communication from crowdfunded company and investor will come from the market (or perhaps the Securities and Exchange Commission “SEC”) ironing out the process. For example, if a funding portal requires that companies seeking funding through their site must provide crowdfunding investors a quarterly update on how things are going and that requirement is favorable to all parties involved then that standard could be adopted by the industry. This will hold true for other investor roles as well.

As far as the law goes on what an investor’s role is post funding, the JOBS Act is virtually silent. However, one thing that investors can count on is reports of the results of operations and financial statements of the company they funded at least once a year. The content of those reports is up to the SEC to decide; so that leaves the investor hardly any information at this moment in time on what to expect post funding. Like many other parts of the JOBS Act, the rules by the SEC will shed light on how an investor’s role after a successful funding campaign. Additionally, market participants will also play a large part in the idiosyncrasies of the relationship between crowdfunding investors and crowdfunded companies.

Jason Burmer, JD
VC Relations

EarlyShares.com
Mobile: (813) 690 4804

Office: (786) 565 3344
Fax: (786) 565 3346

 

 

 

 

 

 

 

Crowdfunding is Here and so is the Infrastructure

CROWDFUNDING IS HERE AND SO IS THE INFRASTRUCTURE

The language of crowd funding technology, capital formation, the requirements and the rules and regulations has been centered on Funding Platforms for the Intermediaries (Brokers and Register Funding Portals). However, some thought leaders in the industry have been listening and speaking a different language and realized that in order for crowd fund investing to be sustainable, the physical components of interrelated systems that provide the framework, commodities and services to the market place is essential to enable, sustain, and enhance the physical and organization structures for the crowd funding ecosystem to function properly. 

Companies like the Funding Roadmap, Crowdnetic, CrowdBureau, Gate Technologies and CrowdCheck have banded together to create solutions that span the life of a company, from idea to sustainability. Viewed functionally, the crowdfunding infrastructure facilitates the production and maintenance of compliant equity and debt based offerings that will eventually list on registered funding portal platforms that will serve as conduits of salient information for the investors.  These services cover reporting, real-time market data, ratings, research, anti-money laundering, compliance, escrow services, clearing and settlement.

Infrastructure companies play a significant part in evolving the crowd fund ecosystem, both in terms of where the interconnections are placed, made accessible and in terms of how much information can be carried and how quickly. As required in crowd investing, security, transparency and information will be required in order to help investors, “the Crowd,” make informed decisions. Crowd intelligence along with aggregated data and research services that track the lifespan of an issuer’s capital raising efforts make the provision of these services unique and absolutely necessary to the long-term health and sustainability of the crowd investing industry.

Every day debt and equity raises are being conducted on pioneering sites like TheFundersClub and CircleUp that allow investors to invest relatively small amounts in start-ups and operating companies, alike. While these sites cater to accredited investors, defined by the Securities and Exchange Commission as anyone making over $200,000, individually, or $300,000 jointly per year, or who have a net worth (minus their primary residence) of $1 million, that’s a lot of individuals. The JOBS Act, Title III caters to the non-accredited investor making the landscape that much larger.  The reality is the JOBS Act, even if the SEC delays their rulemaking, opened America’s eyes to the fact that laws already existed that allowed emerging companies to gather investments from a large group of investors. The use of the internet for this activity is now a means to reach more investors efficiently.

It is critical to observe that equity and debt based crowdfunding is not the Kickstarter model, which is reward/ donor based and allows ideas like video games and gadgets to be pre-sold to the masses. Equity and debt based crowdfunding, allows for shares of a company to be sold to non-accredited investors whereby transactions are facilitated on a funding portal and will be a welcome and new critical component to the traditional capital markets. What self-directed investing, vis a vis online brokers like eEtrade and Schwab, did for the masses in the ‘90s crowd investing will do for the private placement market.

With 2013 quickly approaching, it is important for the ears of the “Crowd” to become fine tuned to the language that the crowdfunding industry speaks. Realizing that this new way to create capital formation is not solely dependent on having a great idea or the Funding Portals, but rather the infrastructure, information and ancillary services that will enrich the end-to-end experience of the entrepreneurs and the investors.  Third party service providers like the Funding RoadMap, Crowdnetic, CrowdBureau, Gate Technologies and Crowdcheck to name a few will continue to make steady strides in developing a healthy ecosystem that will support capital formation, lend a helping hand towards education and further advance the crowd investing  industry.

 

Luan Cox

Kim Wales,