SEC to Investors: “It’s Your Turn to Get Wealthy”
Editor’s Note: We’re publishing today to bring you a special update from one of our good friends, former Tycoon Report writer and former Publisher of IFII, Wayne Mulligan. These days, he’s at the forefront of a brand new, and very exciting, investing avenue that’s just opened up to individual investors. Enjoy the read…
In October of 2007, a little known Internet company run by a 21-year-old kid was raising a few hundred thousand dollars from investors. At the time, the company was valued at $3 million.
2 months ago that same company was acquired by Yahoo!… for over $1 Billion. That one investment made its early investors hundreds of millions of dollars.
The company I’m talking about is Tumblr – maybe you saw the headline back in May.
The amazing thing is, there are hundreds, if not thousands, of companies like Tumblr out there – start-ups that are raising money, and have the potential to beat the odds and become the next billion-dollar acquisition.
Historically, however, very few investors could get access to these types of opportunities. First of all, the SEC didn’t allow start-ups to advertise that they were raising money. So if you weren’t a wealthy investor who was part of the tight-knit tech scene in San Francisco, New York or Boston, you wouldn’t even know these deals existed. Secondly, only super wealthy individuals were allowed to invest.
Well, thanks to the SEC, all that is about to change.
Let’s take a quick look at the legal changes that are creating this new opportunity, then I’ll tell you how to find these deals…
A Bold Move by the SEC
For years, wealthy investors have had the right to invest in high-growth companies at their earliest stages. In some of the boldest changes to U.S. securities laws in nearly 100 years, the SEC is about to give the rest of us the same access. The revolution is called equity crowdfunding.
The narrative around this topic began a few years ago over a beer – in fact, $300 million worth of beer. The beer was Pabst Blue Ribbon, and the year was 2008. Pabst had put itself up for sale for $300 million, and just for kicks, a savvy Internet guy named Mike Migliozzi launched a website to see if he could entice hundreds and thousands of people to make small financial commitments that added up to $300 million.
Mike’s stunt to fund the investment from a huge crowd of individuals was working well – until it stopped working at all. After Mike received commitments for more than $200 million, the U.S. Securities and Exchange Commission (the SEC) showed up and shut him down. The problem? The investors writing checks were just regular folks, not the high-net-worth individuals called “Accredited Investors” that the SEC allows to invest in such private deals.
Frustrated by the SEC’s stance, a group of citizens took shape and began hatching plans. They reasoned that, as long as each individual was committing only a small amount – as little as, say, $25 or $100 – everyone should have the right to invest in companies they liked or thought would grow in value. These citizens decided to pay a visit to our lawmakers in Washington, D.C. and make some noise.
Kicking It Up a Notch
You may already be familiar with the term “crowdfunding.” For the past couple of years, people have used the term in reference to websites like Kickstarter .com and Indiegogo .com. These websites allow people to post ideas for businesses or products and collect cash “donations” from across the world to help get the projects off the ground.
In return for their cash contribution, the supporter might receive a T-shirt, a sticker, or a ticket to a concert. Other times, the supporter might receive the entrepreneur’s product – whether it’s a cool new watch, a pair of shoes, or an organic food product.
Crowdfunding is turning into a huge business. Research firm Massolution reported that in 2012, 308 crowdfunding platforms across the world raised $2.7 billion. Many predict that the market will reach $5 billion or more in 2013. And since no stock or financial securities change hands with donation-based crowdfunding, and since there’s no expectation of a financial return, the SEC considers this activity perfectly legal.
… And All I Got Was This T-Shirt
But isn’t it kind of a bummer that some of these companies will go on to make millions of dollars, and all you got was a T-shirt or some dried apricots? While start-ups can be a risky investment, some of them become extremely successful. Tumblr is just one example of a young company that was acquired for billions of dollars, making their earliest investors fantastically rich.
Wealthy individuals, often called “Angel Investors,” have been investing in private companies like these for years. Now, thanks to a vocal group of citizens as well as the efforts of Congress and President Obama, ordinary citizens will be able to invest a small and affordable amount of money in a company they believe in, and in exchange, receive an ownership stake.
This revolutionary change is called equity crowdfunding, and hundreds of websites called “funding portals” – sites like CircleUp and AngelList, to name two – are popping up to help match startup companies with potential investors like you.
Let’s Get This Party (Jump) Started
To get things started, on April 5, 2012, President Obama signed into law what’s called the Jumpstart Our Business Startups Act, or the JOBS Act, for short. Basically, the JOBS Act legalizes equity crowdfunding, subject to rules that the SEC will soon provide. The clever name – the JOBS Act – is a reference to the fact that more than half of all new jobs created in the U.S. come from startups.
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Bzzzzz Is for Business
Rewards-based Kickstarter has gotten lots of press lately. It recently had its most financially successful campaign ever: The producers of the Veronica Mars television show raised nearly $6 million on Kickstarter to bring the show back to the airwaves.
But the buzz for equity crowdfunding keeps getting louder and louder – and if cues from popular culture are any indication, interest in startup investing is hitting a fever pitch.
Shark Tank, for example, recently became America’s No.1 most popular TV show on Friday nights. It features investors such as Mark Cuban, a successful entrepreneur and the billionaire owner of the NBA Dallas Mavericks, who hear pitches from “aspiring entrepreneurs” seeking investment dollars for their business or product.
Meanwhile, Forbes recently reported that LinkedIn, the social network for professionals, has a new group called “CrowdSourcing and CrowdFunding.”
More than 19,000 members have already signed up, compared to the approximately 1,400 members of the “IPO” group. As Deborah Jacobs, the author of the Forbes article, noted, “It is impressive that a concept barely in the investor lexicon two years ago has captured the imagination and attention of so many.”
Skeptical? You’ve got every right to be. But keep in mind that before the emergence of online brokerage platforms like E*TRADE, plenty of smart people thought average citizens would never go online to trade and invest in stocks. E*TRADE’s annual revenues today? More than $2 billion.
The Next Tumblr?
So where do you find these early-stage opportunities? How can you invest in the next Tumblr?
One option is to join the several dozen equity crowdfunding portals that exist today. Be diligent, however, because it’s expected that there will be hundreds of these sites before long. And be sure to visit each one often so you don’t miss an opportunity.
Alternatively, you can join Crowdability.com >>
Crowdability aggregates all of the equity crowdfunding deals from around the web, and sends them to you by email every week for free.
Click here to sign-up and learn more now.
Best,
Wayne Mulligan
Founder, Crowdability.com
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