Crowdfunding Your Startup’s First Million

May 26, 2016

Plenty of startups eagerly vie for the attention of angel investors, venture capitalists and the like. When you can’t get the money your startup needs from those guys, you can always just sell equity, right? Only if you want to violate federal securities law.

Even though your startup is an LLC or, at very least, isn’t a publicly traded company, selling equity or debt in your startup still qualifies as selling securities. Before 2012 this meant that you had to either 1) register with the Securities and Exchange Commission or 2) claim a Private Placement Exemption under Regulation D. Unfortunately these were both still too cumbersome for most startups.

Enter the JOBS (Jumpstart Our Business Startup) Act.

As many of you may already know, the JOBS Act (or “the act” for the purposes of this discussion) seeks to lower the bar in terms of difficulty in obtaining funds from investors. Two pieces of the act have been in place for some time. Firstly, startups can advertise their offerings online. Unfortunately the only qualified buyers are “accredited investors” who have a net worth of over $1,000,000. Secondly, the act implements Regulation A+ which allows greater variety of investors, but comes with the burden of heavy reporting requirements almost like an IPO without the huge up-front cost.

Last Monday a third piece of the act rolled out and it’s going to be interesting watching it flourish… or flop.

Title 3 of the act allows startups to raise $1 million through “funding portals” from any kind of investor. Try really hard not to think of a “funding portal” as something from Star Trek. Maybe I should drop the quotes. A funding portal is, put simply, like a Kickstarter or Indiegogo for startups seeking investors that is registered with the SEC and FINRA. Instead of receiving perks or merchandise, investors get equity. In fact, Indiegogo has actually been ready to act as a Title III funding portal for a while now.

Here are some of the issues I’m interested in watching play out:

  • Equity purchased here is not trade-able so is this really going to lead to smart investments or just guesses and gambles on who will be the next big thing? I guess small biz wins either way and investors are protected (mainly from themselves) by maximum investment thresholds that correlate to annual income and net worth.
  • Will there be a lot of good companies on the portals or startups that couldn’t otherwise secure funding? Here, I suppose the mass of people in the investor market will be the judge of a company’s worthiness.
  • For the companies, might we see instances where a glut of investors force them public?
  • The startups will be subjected to comparatively high reporting requirements and greater difficulty in avoiding legal pitfalls. Good counsel and legal departments will be key here.