I'm always checking out startup action in Silicon Valley. The JOBS Act of 2012 was supposed to make that easier. Performing due diligence online is one thing but actually closing an investment round is quite another. The Idea to IPO Meetup group presented Roger Royse of Royse Law Firm last week down at Menlo College to give us all a rundown of the current state of crowdfunding.
The JOBS Act was intended to further democratize the venture investment playing field so that securities laws could catch up to technology. Roger mentioned that the cost of fundraising has dropped in recent years and technology has expanded the types of offerings available. He's published some good info on crowdfunding at his Royse University site. The complications for startups raising money through crowdfunding portals can be tricky if those portals are open to any investors other than venture capital funds or angel groups.
The JOBS Act was supposed to make venture investing easier for individual investors but the SEC's rule changes so far are intended to apply to accredited investors. Roger mentioned that Title III of the JOBS Act for retail investors does not yet have the force of law because the SEC has not yet finalized regulations.
Roger noted that venture capital firms have already begun stigmatizing crowdfunded companies as being otherwise unfundable. Crowdfunded companies may find themselves in a "market for lemons" if they cannot obtain a subsequent funding round, forcing them to focus on an exit strategy. I've heard VCs on public panels mention crowdfunding as marginally useful in extending the life of a startup that could fail prematurely, but that is probably a minority opinion.
Companies can advertise on crowdfunding portals for accredited investors now that the SEC has lifted the general solicitation prohibition. The challenge for startups is that the SEC's rules are still in a state of flux and FINRA is still working on certifying crowdfunding portals that comply with the rules. The SEC may be considering easing some investor verification requirements. Roger thinks this environment is why startups need to get more conservative and refrain from discussing their financial status until the SEC finalizes more rules. Pitchfests in front of investor panels may be considered a general solicitation.
I appreciated Roger's revelation that the SEC now considers a one-time placement fee for locating funding to be a transactional relationship requiring a registered broker. I used to hear stories from old finance hands about how they earned finder's fees for connecting deal flow to investment banks on a freelance basis. I had considered doing that myself for a while but I elected not to keep my securities licenses active once I launched into public commentary in 2008. I was very aware (during my financial advisor days) of the SEC's guidance on public commentary for those who maintained securities licenses and fiduciary relationships. Assuming a role as public commentator required me to surrender any and all means of maintaining fiduciary relationships or mediating transactions. There are ways to navigate conflicts of interest but I'd prefer to avoid conflicts entirely. I don't play games with my career or the law. All I do now is speak my mind and invest my own money, any way I like.
Roger's talk was awesome and he covered way more legal ground than I can summarize here. I spoke with him and some other entrepreneurs afterwards on the future usefulness of crowdfunding in such a complex regulatory environment. I now believe the main advantages of crowdfunding for startups are the reduction of friction in closing deals and the compressed time windows for feedback. Friction is lower on those portals that have broker/dealer affiliations, because accredited investors can theoretically complete a transaction online. Feedback times are shorter because a startup can now appear in front of the entire early-stage investor universe simultaneously instead of spending months getting on the meeting calendars of angel groups up and down California. The speed of feedback from investors, either positive or negative, will help startups pivot earlier if they combine it with feedback from their CustDev efforts. BTW, I'm still convinced that those portals showing early success in generating deal flow will become acquisition targets for major brokerages. They will be even more attractive if they add microfinance and P2P lending functions.
I'm already applying some of the insights Roger shared. I've been attending pitchfest and business plan competitions for years. I even pitched a tech startup idea myself as an undergrad at the University of Notre Dame in 1995. I didn't state any disclaimers back then and neither have any of the entrepreneurs I've heard since then. That is all going to have to change very quickly. I attended a pitchfest in San Francisco last Friday and noticed that the startups in attendance need to get legal advice, get their paperwork in order with the SEC, and start using legal disclaimers that investors like me will respect. They also need to be mindful of the FTC's privacy policy guidance if they handle customer data. Failure to do so can subject them to severe regulatory sanctions. I care as much about my own portfolio as entrepreneurs do about their startups, which is why early stage founders need to mitigate regulatory risk by keeping top advisers like Roger Royse in their hip pockets.
Full disclosure: I have received no compensation from Roger Royse, his corporate entities, or the Idea to IPO Meetup organizers for this article. This article, or anything else published under the auspices of Alfidi Capital, does not constitute legal or financial advice.
The JOBS Act was intended to further democratize the venture investment playing field so that securities laws could catch up to technology. Roger mentioned that the cost of fundraising has dropped in recent years and technology has expanded the types of offerings available. He's published some good info on crowdfunding at his Royse University site. The complications for startups raising money through crowdfunding portals can be tricky if those portals are open to any investors other than venture capital funds or angel groups.
The JOBS Act was supposed to make venture investing easier for individual investors but the SEC's rule changes so far are intended to apply to accredited investors. Roger mentioned that Title III of the JOBS Act for retail investors does not yet have the force of law because the SEC has not yet finalized regulations.
Roger noted that venture capital firms have already begun stigmatizing crowdfunded companies as being otherwise unfundable. Crowdfunded companies may find themselves in a "market for lemons" if they cannot obtain a subsequent funding round, forcing them to focus on an exit strategy. I've heard VCs on public panels mention crowdfunding as marginally useful in extending the life of a startup that could fail prematurely, but that is probably a minority opinion.
Companies can advertise on crowdfunding portals for accredited investors now that the SEC has lifted the general solicitation prohibition. The challenge for startups is that the SEC's rules are still in a state of flux and FINRA is still working on certifying crowdfunding portals that comply with the rules. The SEC may be considering easing some investor verification requirements. Roger thinks this environment is why startups need to get more conservative and refrain from discussing their financial status until the SEC finalizes more rules. Pitchfests in front of investor panels may be considered a general solicitation.
I appreciated Roger's revelation that the SEC now considers a one-time placement fee for locating funding to be a transactional relationship requiring a registered broker. I used to hear stories from old finance hands about how they earned finder's fees for connecting deal flow to investment banks on a freelance basis. I had considered doing that myself for a while but I elected not to keep my securities licenses active once I launched into public commentary in 2008. I was very aware (during my financial advisor days) of the SEC's guidance on public commentary for those who maintained securities licenses and fiduciary relationships. Assuming a role as public commentator required me to surrender any and all means of maintaining fiduciary relationships or mediating transactions. There are ways to navigate conflicts of interest but I'd prefer to avoid conflicts entirely. I don't play games with my career or the law. All I do now is speak my mind and invest my own money, any way I like.
Roger's talk was awesome and he covered way more legal ground than I can summarize here. I spoke with him and some other entrepreneurs afterwards on the future usefulness of crowdfunding in such a complex regulatory environment. I now believe the main advantages of crowdfunding for startups are the reduction of friction in closing deals and the compressed time windows for feedback. Friction is lower on those portals that have broker/dealer affiliations, because accredited investors can theoretically complete a transaction online. Feedback times are shorter because a startup can now appear in front of the entire early-stage investor universe simultaneously instead of spending months getting on the meeting calendars of angel groups up and down California. The speed of feedback from investors, either positive or negative, will help startups pivot earlier if they combine it with feedback from their CustDev efforts. BTW, I'm still convinced that those portals showing early success in generating deal flow will become acquisition targets for major brokerages. They will be even more attractive if they add microfinance and P2P lending functions.
I'm already applying some of the insights Roger shared. I've been attending pitchfest and business plan competitions for years. I even pitched a tech startup idea myself as an undergrad at the University of Notre Dame in 1995. I didn't state any disclaimers back then and neither have any of the entrepreneurs I've heard since then. That is all going to have to change very quickly. I attended a pitchfest in San Francisco last Friday and noticed that the startups in attendance need to get legal advice, get their paperwork in order with the SEC, and start using legal disclaimers that investors like me will respect. They also need to be mindful of the FTC's privacy policy guidance if they handle customer data. Failure to do so can subject them to severe regulatory sanctions. I care as much about my own portfolio as entrepreneurs do about their startups, which is why early stage founders need to mitigate regulatory risk by keeping top advisers like Roger Royse in their hip pockets.
Full disclosure: I have received no compensation from Roger Royse, his corporate entities, or the Idea to IPO Meetup organizers for this article. This article, or anything else published under the auspices of Alfidi Capital, does not constitute legal or financial advice.
