By Madelyn Young
What new capital raising options were created by the JOBS Act? How does “equity crowdfunding” differ from crowdfunding as we know it? How are entrepreneurs complying with the new (and complex) regulations surrounding fundraising?
Those questions and more were raised earlier this month at the second-ever meetup of the PayPal Commerce Factory at The LAB Miami. The event, which was dedicated to the subject of ‘The Crowdfunding Landscape’ and was co-produced by the Milken Institute Center for Financial Markets, brought the leaders of four prominent online funding platforms together with several entrepreneurs who are utilizing crowdfunding to raise money.
EarlyShares CEO Joanna Schwartz (pictured) served as a panelist on the ‘Crowdfunding Platforms’ panel at the event alongside Sally Outlaw, founder of Peerbackers, Juan Pablo Capello, co-founder of Idea.me, and Brandon Jenkins, co-founder of Fundrise. The heads of two companies that are currently raising funds on EarlyShares – Andrew Sturner of BoatSetter and James Rosenberg of Kleo – served on the ‘Crowdfunding Entrepreneurs’ panel with Jordan Magid, co-founder of U-Doodle, a non-profit that successfully raised $10,000 on Indiegogo.
The event introduced attendees to the existing world of traditional rewards- and donation-based crowdfunding, but discussions centered more on crowdfunding’s new frontiers under the JOBS Act. Under the law’s exemptions, a larger swath of individuals and entities can access equity investment opportunities.
Event moderator Daniel Corfine of the Milken Institute, who was recently ranked #9 on VentureBeat’s list of top crowdfunding thought leaders, walked the audience through the problems addressed by the JOBS Act – such as the difficulties small businesses and startups face when it comes to raising capital – and the potential for the law’s exemptions to help solve them.
Since the comment period for the SEC’s proposed rules for equity crowdfunding under Title III of the JOBS Act just ended, the Platform panelists shared their thoughts on the pros and cons of the draft rules that would ultimately enable the general public to invest in early-stage businesses.
Joanna Schwartz addressed one of the major issues broached by the rules as drafted: the massive costs they would impose by requiring issuers to submit audited financials to the SEC before and after conducting an equity crowdfunding offering.
“In that instance, we feel that a requirement the SEC would be implementing to protect investors would ultimately hurt investors,” said Schwartz. “If I invest in a company, I want all of my money to go toward growing and improving that business – not toward paying for compliance requirements that another entity has imposed on it.”
But even excluding Title III, the JOBS Act has already opened up new avenues that help entrepreneurs close the funding gap. One is the Title II General Solicitation exemption, which enables business owners to advertise their investment opportunities to Accredited Investors. Andrew Sturner of BoatSetter and James Rosenberg of Kleo are conducting General Solicitation offerings on EarlyShares.
And though the new regulations for General Solicitation present somewhat of a minefield to issuers – who have to comply with a multitude of other securities laws as well as verify that all investors in their offerings meet the SEC’s Accredited Investor criteria – the panelists said that partnering with an experienced funding platform has made compliance easier.
“There’s so much value in conducting the offering process through a platform like EarlyShares,” said Rosenberg, Founder and CEO of Kleo. “It guides you through the process, so that investors can find all the information they need about your business in one place.”
Sturner, who is Founder, Chairman and CEO of BoatSetter, echoed Rosenberg’s sentiments and said that despite the newness of online General Solicitation, the protections and transparency of the processes have provided his potential investors with an enhanced sense of confidence in the offering.
“When your investors can go online and see a Due Diligence checklist and find all of your financials and terms in one place, it adds credibility to the process,” said Sturner. “Even for people in your existing network.”
When it comes to the future of fundraising – especially through equity crowdfunding –the speakers at the event echoed many similar sentiments: That the due diligence involved in posting online offerings lessens the potential for fraud; that there’s a wealth of investor education will need to happen as the general public becomes able to invest; and that most crowdfunding offerings (equity and rewards alike) will continue to find most of their contributors from the issuer’s own network.
The consensus on the Platform panel was that it’s ‘about time’ for crowd investing to disrupt investing as we know it. For decades, only a select number of wealthy Accredited Investors have had access to equity opportunities in private companies. But the time has come for more democratized access to capital.
And as Brandon Jenkins of Fundrise put it, “the non-accredited investor isn’t necessarily an unsophisticated investor.”
Madelyn Young is the content development manager at EarlyShares.com.
Posted Feb. 22, 2014