By Andrew Gordon on April 1, 2015 Dear Early Investor,
Maybe the government really does care about the everyday investor...
Last week, we saw it finally do something about the fact that tens of millions of Americans have been shut out of the startup investing space.
Imagine investing in Twitter in 2009, years before it went public.
That September, investors bought $100 million worth of shares at a $1 billion valuation. The company is now worth over $32 billion.
A few months before, Twitter raised $35 million at a $250 million valuation. It has gone up 128-fold since then.
Suppose one of those raises was for $50 million at a $500 million valuation (twice the $250 million it got earlier that year and half the billion-dollar valuation it got later in the year).
But instead of the half-dozen handpicked VC companies participating, everybody was invited to the party. And you could make an investment for as little as $1,000 or less if you liked.
That $1,000 investment would be worth a great deal today.
But that $50 million raise open to everybody who wanted to plunk down $1,000 wasn't possible back then...
But it should be available this August!
Thanks to new government rules announced last week by the SEC.
What Exactly Has Changed?
That's easy: State filing fees have been done away with under parts of Title IV of the JOBS Act.
Now let's back up for a moment, shall we?
These new rules have nothing to do with Title II general solicitation rules. Those rules allowed the open discussion of some deals, but were for accredited investors only.
And don't get it confused with Title III crowdfunding rules. Those rules (once the enabling regs are issued) would make it possible for everyday investors to buy shares in startups. But they apply to much smaller capital raises.
What we're talking about here are big raises, roughly equivalent to a Series B round. They've already been dubbed "IPO Lite." |
| You Get More Investment Options
For the first time ever, you can invest in mid- to late-stage startups via direct offerings. Right now, the only way you can participate is indirectly, via the secondary market.
A portal specializing in these "secondary" shares is MicroVentures. Its founder and CEO, Bill Clark, says that the new rules are "a good step forward but with limited appeal to tech startups."
What does he mean?
Not many startups will want possibly thousands of investors on their cap table. It creates daunting communication requirements. And future VC investors usually don't like such messy cap tables.
Isn't there a way to get around this?
Yes, perhaps by creating a separate class of shares. For example, one that doesn't include voting rights. But such solutions aren't without their own problems.
OK, I'm listening.
Like treating the investor who puts in $50K the same way as the one who puts in $2K. The investor with the $50K stake wouldn't take too kindly to not being granted voting rights. Or not getting "pro rata" rights - by the way, they involve the right to invest down the road to prevent dilution of early equity stakes.
Is this as serious as it sounds?
Probably more serious than you think. For a fast-moving tech startup, communicating with thousands of investors creates conflicting aims of providing openness and preventing leaks. What you'd share with three or four major VC investors and what you'd share with a thousand investors is completely different. What would prevent a competitor jumping on board with a token investment? Nothing. Compare that to a traditional VC investor who gives invaluable guidance and shares his network of experts. As a founder, the choice is a no-brainer in most cases.
But at least the government is removing itself from the process? That's a positive development, right?
Quite the opposite. Companies that engage in general solicitation need to confirm their investors qualify as "accredited." That's basically it as far as government requirements go. But under these new regs, if you're raising between $20 million and $50 million, you have to file annual and semiannual reports with the SEC, plus audited financial reports. Even if you're raising less than $20 million, you have to file an "Offering Circular" with the SEC. And the SEC will be reviewing them extremely closely.
Are you saying that startups would have to be crazy to raise money under the new regulations?
Not exactly. Some companies will go there. The new regulations do away with state filing fees for raises above $20 million. And the cost to do an "Offering Circular" should steadily go down, as law firms figure out and standardize the process.
And how do the new regulations affect raises below $20 million?
They're different. The good stuff first. They'd have no ongoing disclosure and filing requirements. And investors can hop on board a startup without self-certifying their income or net worth. But companies won't be drawn to these smaller raises because of one fatal flaw. The startup would have to file in every state it wants to raise in. No startup would want to do that. So only local companies doing local business might take advantage. I'm thinking of the local pizza parlor that wants to expand into more neighborhoods, for example. In such cases, investors wouldn't hope for an IPO. They'd do it for the added income stream.
So, the MicroVentures' portal isn't tempted to jump into this supposedly significant opening?
We might, eventually, but not right away. It'll take at least a few months for the dust to clear. We want to do what's best for investors who visit our portal. In particular, we'd like to make sure they're not treated as second-class shareholders - without voting or pro rata rights - especially if they've made a sizable investment.
Last words?
We're open to see what works and what doesn't. What could evolve is a kind of hybrid raise, part Regulation D (general solicitation) and part Regulation A+ (what the new regs are called). I think concurrent offerings might be possible.
I'm with Bill on letting things develop and see what works best for everyday investors.
I believe there's still a place for Title III. We still need regs that allow non-accredited investors to put in as little as $100 into startups raising modest amounts in the early rounds.
I'm hoping the SEC will come out with these regs this October, as many expect.
In the meantime, portals like MicroVentures are attracting top-tier deals for their members. We've arranged a second fund with MicroVentures for Startup Investor members. This one features early-stage companies and is available to accredited investors only. Watch for an invite in your mailbox soon.
Good investing,
Andy Gordon
Founder, Early Investing    
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By Peter Clough on March 27, 2015 While the equity crowdfunding industry impatiently waits for the SEC to move forward on issuing rules for Title III of the JOBS Act, many states have gone ahead and enacted provisions of their own. Read on...
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