VentureBeat recently reported that funding marketplace MicroVentures
raised over $16 million for tech startups. Over the past 2 years, MicroVentures has reviewed over 2,000 companies and through its rigorous review process, filtered the prospective list to less than 40, which met the criteria to raise on the platform. This represents approximately 2 percent of the companies that initiated the process. Once the SEC issues the final rules around the JOBS Act, it will pave the way for funding portals to start equity-based crowdfunding
, giving more startups an opportunity to find a place to raise capital. Many of those 2,000 companies will now have another resource available to raise capital online.
What does this mean for investors?
It means that investors will likely spend more of their time searching multiple “Equity Crowdfunding” sites attempting to understand the risks associated with deals on any given platform. Early stage investing is inherently high risk/reward. However, risk correlates closely to transparency, which can only be achieved through professional due diligence performed by experienced individuals. Over the last year we have seen an uptick in the number of companies requesting funding as a result of the JOBS Act. Because of this, it is critical that investors are only offered opportunities that have been properly vetted and reviewed prior to listing on a given site, in order for the investor to make an intelligent and informed investment decision. This review coincidentally also adds value to the company looking for capital, as it helps them understand what information is important to investors from Day One, helping them start with shareholder value in mind.
What do online investors look for in a deal?
Here are a few of the many factors investors look for when reviewing a startup:
1) Experienced Team – Investors look for a team that has experienced both success and failure. They look for teams that have met challenges and figured out how to get over, under, around, or through.
2) Traction – For early stage companies traction doesn’t necessarily have to be revenue. It could mean a successful beta with active users and a healthy growth rate. However, proof of execution is key.
3) Angel Money – Investors would like to see investments from angels or VCs, who can add value beyond simply capital.
Receiving positive feedback in the three areas above may create initial interest from investors reviewing an opportunity on an online platform. However, in order to create a win-win for both investors and the company raising capital, investors must have access to fundamental information about the company and be able to determine whether any growth inhibiting liabilities exist. Without rigorous due diligence, this is impossible. For example, it is great to see high profile angel investors participate in a round with a company you might have interest investing in, but that information alone provides you with no detail regarding that investor’s agenda, reason for investing in the given company, personal relationship with the company, etc. It is paramount as an investor that you understand how each startup featured is being vetted and that the due diligence criteria matches aligns with your methodologies for making risk-based decisions.
At MicroVentures, we proactively perform two levels of due diligence before our investors review an opportunity to ensure that we are offering what we believe are high quality, curated opportunities. Further, MicroVentures provides the necessary transparency and tools to investors so they can perform their own due diligence before investing. If you would like to be a part of the investor community at MicroVentures, please sign up today. It is free to join.
Fosted From : http://venturebeat.com/2013/05/25/why-due-diligence-matters-in-equity-crowdfunding/#jbupA7oS5IKRElxo.99
Illegitimate crowdfunding requests and investment-for-visa schemes are among the new financial products and practices the North American Securities Administrators Association said are threatening to exploit unsuspecting investors.
In its 2012 list of top investor threats, the association issued guidance to help people avoid the financial pitfalls and encouraged people to report the deceptive practices to regulators. The Indiana Secretary of State's office is a member of the association.
Other pitfalls on the list include unsolicited communications to invest in gold and other precious metals, risky oil and gas drilling programs, and real estate investment schemes.
Indiana Secretary of State Connie Lawson said investors should independently verify any investment opportunity as well as the background of the person and company offering the investment. State securities regulators provide detailed background information about those who sell securities or give investment advice about the products being offered.
"Investors should insist on working only with licensed brokers and investment advisers in dealing with both traditional and alternative securities investments, and should quickly report any suspicion of investment fraud to our office," Securities Commissioner Chris Naylor said.
For more information about the top pitfalls facing investors, visitwww.in.gov/sos/securities/files/Investor_Traps.pdf.
Posted from: http://www.nwitimes.com/business/local/securities-group-releases-list-of-top-investment-scams/article_369d2442-a197-54e6-a775-ba6beb1638e4.html
Crowdfunding trend thrust into spotlight by Canadian campaigns
Re Posted :
A burlesque troupe, a film about female Palestinian race car drivers and a bullied American bus monitor — as diverse as those topics are, they all share a common Canadian thread.
All three projects sparked crowdfunding campaigns, an Internet-based trend thrust into the spotlight recently by a Toronto man's wildly successful fundraising effort for a Rochester, N.Y., grandmother.
Max Sidorov responded to heart-wrenching video posted online of bus monitor Karen Klein being tormented by a group of schoolchildren by setting up a campaign on fundraising site Indiegogo.
More than 30,000 donors responded to that effort by donating more than $700,000, far surpassing Sidorov's original target of $5,000 to give Klein a much-needed vacation.
'It also raises the spectre of $700,000 being raised for a single person who doesn't really need it.'—Ken Wyman, Humber College
Crowdfunding skips a step by avoiding charities, and gets money directly from a donor to the person being helped.
There are fewer fundraising costs involved, but some of the organizations aren't registered with the Canada Revenue Agency, which acts as a charity watchdog, said a fundraising and volunteer management professor at Humber College in Toronto.
"If you're using crowdfunding, the moment the money is out of your bank account, you've lost all control of it," said Ken Wyman.
Fraud is a possibility, he said, because if a charity isn't registered, there is no way to guarantee where a donation is going.
"It also raises the spectre of 700,000 dollars being raised for a single person who doesn't really need it or know what to do with it in a world where 700,000 dollars could save many lives," Wyman said.
Canadian-born filmmaker Amber Fares has raised more than $26,000 on Indiegogo to fund her first feature-length film Speed Sisters: Racing in Palestine, and Toronto-based burlesque troupe Les Coquettes has raised almost $3,000 to support touring and production over the next two years.
New campaign fizzles
Sidorov's second campaign, Seven Million Acts of Love, has not seen the same groundswell of support as his fundraising effort for Klein.
The Indiegogo page went live more than a week ago and has so far raised little more than $700 of his $7 million target.
That massive goal may be scaring off potential donors, said Wyman.
"Using a number as big as seven million is a psychological turn off," he said.
Wyman said Sidorov's first campaign was so successful because it tapped into a fundraising basic: stick to one person.
"Well-established research in fundraising indicates that helping one person is something that we can all identify with," he said. "As soon as we start talking about two people, donations drop off."
Wyman pointed to his experience in international development.
"It was much easier to raise money for one child than for a village, never mind a nation, that was suffering from a drought in Africa, or a war zone," he said.
Sidorov said his second campaign is just getting off the ground.
"Obviously it's not as significant, but I think that's just because it hasn't had a lot of attention yet," he said. "We haven't actually launched anything yet."
The campaign's goal is to create a television series, a website and a charity organization, as well as provide free counseling for bullied kids.
Campaigns need one clear goal
Calgary-based fundraising consultant Guy Mallabone said the video of Klein being bullied that went viral was a crucial part of Sidorov's success.
"It was that dramatic footage on the bus, really pulling at people's heartstrings," said the president and CEO of Global Philanthropic Inc.
Mallabone tells his clients to identify one clear goal or "a good reason for why anybody would consider making a donation to the cause."
Crowdfunding is still a relatively new phenomenon and people in the industry are watching it carefully.
"We don't know yet what the impact is going to be on more 'traditional' forms of fundraising," he said.
But with Sidorov raising more than 140 times his target for Klein, crowdfunding can't be ignored.
"Cleary crowdfunding is very effective and to some degree it scares charities," said Wyman.
In the early days of crowdfunding, it's not yet clear what demographics the fundraising method appeals to, Mallabone said.
"The millennials today are quite jaded when they take a look at some more traditional structures in society," he said. "(Crowdfunding) appears to be attracting newer donors, people who haven't given philanthropically before, which is pretty exciting."
Attracting new donors is one thing, but getting retaining existing donors may be a challenge for crowdfunding initiatives. Registered charities keep a database of donors, so without a way to tap into donors on a regular basis, some web-based fundraising platforms may be at a disadvantage.
"Getting people to give a second time is one of the biggest challenges that the world of fundraising has," Wyman said
Congress passed a federal crowdfunding law. This was really exciting, but the federal law is problematic for many, many reasons.
As you are probably well aware by now, Congress passed a federal crowdfunding law. This was really exciting, but the federal law is problematic for many, many reasons. What are the problems with the federal crowdfunding law? To name just a few:
- Companies won’t be able to use crowdfunding as a fundraising tool until the SEC issues lengthy, complex regulations. We have no idea how long this will take. Already the SEC has delayed issuing regulations on a much simpler topic. The crowdfunding regulations may very well be delayed as well.
- The federal crowdfunding exemption forces companies to use registered broker-dealers or registered funding portals. Most private companies raising funds do so without the help of broker-dealers or other intermediaries. But for a company to crowdfund under the federal exemption, it will be forced to use an intermediary. This is unfortunate.
- By virtue of the particulars of the law, companies are going to have to expend significant resources in order to comply with it to raise funds (e.g., PPMs, audited financial statements, etc.). It is going to be very expensive. Call it “Sarbanes-Oxley for Startups.” The law’s costs and burdens are disproportionate to the capped amount of money companies are allowed to raise.
In short, the federal law is, in the opinion of many (and not just lawyers, but other business persons as well), not going to work very well. It is unfortunate that out of the JOBS Act the law appears headed toward making it more difficult for early stage companies to raise money rather than the opposite–when it was clearly the intention of the Congress that the JOBS Act would make fundraising for early stage companies easier.
It is a common lament in Washington that there is not enough funding to go around for all of the companies here. We suffer some “flight”—meaning that smart folks take their pitches to Silicon Valley, where there is more money to fund companies. I agree that we need more money for companies here, and that is why I am writing to advocate that the state of Washington should adopt its own “mini-crowdfunding” law.
It is not uncommon for states to pass “mini” laws. For example, California has a “mini-Warn Act.”
Washington should enact its own mini-crowdfunding exemption, but it should not be modeled on the federal act. Instead, the Washington Securities Division or the Legislature should craft an exemption that will work for local businesses and investors.
What Does A Good Crowdfunding Exemption Look Like?
A “good” crowdfunding exemption would have the following elements:
- A simple, easy-to-determine aggregate proceeds amount (e.g., not to exceed $1M during any twelve month period); normal integration standards would apply to prevent evasion.
- A simple, easy-to-determine per investor limit (e.g., no more than $1,000 per natural person or legal entity).
- Support from state regulators to issue simple regulations or to support legislation in order to bring the exemption to life.
- Protection for directors and officers so that they can have some certainty that they are not going to be personally liable in the case of a business failure (excepting fraud or breach of fiduciary duty, obviously).
The Statutory Approach: Proposed New Statutory Provision
I propose a new subsection to RCW 21.20.320, which exempts certain transactions from the state securities law registration requirements. I propose a new RCW 21.20.320(18) to read as follows:
“The following transactions are exempt from RCW 21.20.040 through 21.20.300 and 21.20.327 except as expressly provided:
(18) Any issuer transaction or sale, if:
a) the aggregate offering proceeds do not exceed $1,000,000 during any twelve (12) month period;
b) all purchasers of securities in the offering are residents of the State of Washington as of the purchase date;
c) no offers of the securities are made to persons who are not residents of the State of Washington;
d) only entities organized in the State of Washington and doing business in the State of Washington may be issuers;
e) no purchaser invests more than $1,000 in the offering;
f) each purchaser executes in writing, in a separate written document, the following:
“I acknowledge that I am investing in a high-risk, speculative business venture, that I may lose all of my investment, and that I can afford the loss of my investment.”
g) no investor who has signed the aforementioned acknowledgment may bring an action against the company or any director or officer of the company except in the case of fraud or breach of fiduciary duty; and
h) the offering is conducted in accordance with the requirements of Section 3(a)(11) of the federal Securities Act of 1933.”
Why Washington Residents Only?
You might ask–why limit this exemption solely to Washington residents, and why prohibit the offers of the securities to anyone but Washington residents? The answer is that we have to fit within federal securities law requirements.
Section 3(a)(11) of the 1933 Securities Act exempts from registration “any security that is part of an issue offered and sold only to persons resident within a single state if the issuer is a person resident and doing business within or, if the issuer is a corporation, incorporated by and doing business within that state.” Federal Rule 147 provides a federal “safe harbor” for offers and sales in compliance with Section 3(a)(11) and creates a checklist for compliance with the federal standard that could be built into a Washington crowdfunding exemption. Washington companies utilizing this exemption would have to take steps to ensure that no non-Washington residents were offered or sold securities in the offering. This requirement could potentially be satisfied by requiring certifications by prospective investors that they are Washington residents in order to log into secure portals to review potential transactions. Each issuer could be required to certify that it is truly a local Washington business, with its principal office in Washington, generating revenues primarily from Washington operations.
Help From State Regulators
To make crowdfunding in Washington a reality under a Washington-specific exemption, advocates, as a practical matter, will need to convince our state securities regulators that the benefits of crowdfunding as a local financing strategy outweigh the potential costs of administration and the risks to the public. If state regulators can be involved in the process of drafting and passing proposed legislation (or, alternatively, adopting a state rule), it will be possible to craft a crowdfunding exemption that will work. Washington could become a leader in crowdfunding, and attract the next generation of entrepreneurs here.
Washington recently became a leader in Social Purpose Corporations. It needs to become a leader in crowdfunding as well.
[authors: David McMahon & Jeevan Subbiah]
In this post, we will deviate from our startup blog series, How to Select New Counsel and Manage Legal Fees, to discuss the recently passed Jumpstart Our Business Startups Act (the “JOBS Act”) and “crowdfunding” that we briefly mentioned in our last blog post. We will outline some key information and issues about the JOBS Act to see if crowdfunding may work for your company.
The JOBS Act Background
The JOBS Act allows “emerging growth companies” (generally companies within five years of their IPO with gross revenue under $1 billion) easier access to raising money, new potential investors and less regulatory paperwork while potentially creating more jobs. Through the crowdfunding provision of the act, startups will be able to raise money by selling equity shares through an online portal (website) registered with the government. This gives everyday “non-accredited” investors the opportunity to invest in startups and receive equity. A major reason for the passing of the JOBS Act was the decline in small company initial public offeringsover the last decade.
Key Aspects for Startups – Crowdfunding
Startups will now be able to raise money through crowdfunding in public markets. CNN Money noted:
"The new law allows a company to use crowdfunding for seeking actual investors. It can raise up to $1 million this way. To protect investors, those with a net worth of less than $100,000 may now invest 5% of their yearly income or $2,000, whichever is higher. Wealthier types can invest up to 10% of their income.”
Another key aspect is that a privately owned startup can stay private longer. CNN Money states:
"Having 500 investors or raising $5 million previously forced a company to register with the SEC -- a costly endeavor… A company with $10 million in assets will now have to register with the SEC when its number of investors reaches 2,000, including 500 who don't meet the "accredited" wealth requirement. And companies with less than $1 billion in annual revenue can enter a five-year phase-in plan with the SEC.”
Issues to Consider
Certain provisions of the JOBS Act went into effect when the law was enacted on April 5, 2012, but the crowdfunding exemption still requires the SEC to draft the specific rules and regulations.
Aside from this uncertainty, startups may also want to consider the benefits of crowdfunding against potential regulations, paperwork, legal risks, and legal and accounting fees. You may want to evaluate your comfort level and capacity for investor relations (quarterly reports, financial reporting, business updates, etc.).
In addition, startups may want to consider the benefits of raising money as needed in separate stages to avoid equity dilution and also so the startup can raise money at later stages when it may be valued higher. Additional issues include whether being crowdfunded makes a startup less attractive if they seek venture capital funding in the future and whether a company could or would want to seek crowdfunding after traditional venture or angel funding.
Security concerns include the legitimacy of the government registered online funding portals that will sell equity shares of companies, the services and disclosures they will provide and the percentage “cut” they will take of the funds raised from equity shares sold.
Debate Over The JOBS Act
Some people believe that the JOBS Act will bring forth strong job creation since only a very small percentage of startups currently receive angel investing. But others, such as former SEC chief accountant Lynn Turner, voiced concern as noted in a Forbes article:
"The proposed legislation is a dangerous and risky experiment with the U.S. capital markets, and the savings of over 100 million Americans who depend on those markets. The evidence does not support the need for it. In fact, it contradicts it. I do not believe it will add jobs but may certainly result in investor losses.”
Others see the potential for a new huge market. As noted in Triple Pundit:
"Fred Wilson, co-founder of the venture capital firm Union Square Ventures (which has invested in Twitter, Tumblr, Foursquare, and Zynga), predicts that once it gets up and running, the equity crowdfunding market will reach $300 billion and will be largely driven by families and individuals investing a small percentage of their assets via crowdfunding. As a point of comparison, a study from Crowdsourcing.org reports that about $1.5 billion was raised from 452 crowdfunding platforms in 2011.”
Tim Rowe, CEO of the Cambridge Innovation Center, noted:
"Americans save about $30 trillion in 401ks, pension funds, IRAs, and so forth.” Redirecting just 1 percent of that to crowd-funded local businesses, would create a pool of money 10 times greater than all the venture capital invested annually and half as big as all outstanding small business loans in the U.S.”
Regulations, Paperwork & Money
Some experts believe that crowdfunding will enable many small startups access to capital. Others doubt that most startups at an early stage of funding will be able to take advantage of the crowdfunding provisions of the JOBS Act due to the regulations and accompanying legal and accounting fees. An article at CFO.com noted:
"Originally, the ability to raise capital from a bunch of individuals through social media without having to register with the Securities and Exchange Commission sounded like a great opportunity for Mom-and-Pop shops or someone starting a business out of his garage. But many entrepreneurs may lack the financial acumen and robust business plans they’ll need to comply with the JOBS Act and possible further regulations from the SEC, say experts. And they also may not have the cash to hire the accountants and lawyers they will need to navigate the law."
The article also notes that the regulations that could raise costs for a startup, stating:
"For up to $100,000 in capital, the company has to submit financial statements signed by the directors, as well as a tax return; between $100,000 and $500,000, the financials must be reviewed by a CPA; and for between $500,000 and $1 million, the financials must be audited.”
Express Liability & Potential Litigation
There are express liability provisions in the JOBS Act related to crowdfunding that may require legal assistance. CFO.com notes,
"As with any other private or public offering, the issuer has to perform due-diligence examinations to ensure there are no material misstatements or omissions in its investor disclosures. Shareholders could sue for fraud, of course. But the JOBS statute also lets an investor who can prove that there was a material misstatement or omission sue for his money back…"
Is Crowdfunding for You?
As you decide whether or not to participate in crowdfunding, it is prudent to keep your business and financial documents in order and up to date (financial forecast, business plan, business deck, etc.) in case you do use crowdfunding. Continue to refine your sales pitch, especially from a financial perspective, and develop tools such as a video, to tell your company’s story in a creative and effective way. You may also want to keep a list and hierarchy of potential investors to approach and continue to weigh the benefits of crowdfunding against traditional methods of raising capital.
Getting Good Advise is Critical
While the crowdfunding provision of the JOBS Act provides a potential new source of funding for startups, there certainly are regulatory concerns, due diligence requirements and legal risks to take into account. In addition, since the SEC regulations are incomplete, additional rules may come forth related to funding portals and requirements for disclosures and communications with equity holders. A startup may want to discuss these issues with independent counsel as well as the costs and benefits of raising money against the potential legal and accounting fees.
Examples of Crowdfunding Companies
Triple Pundit and CNN Money have detailed some key examples of crowdfunding companies.
JOBS Act as signed into law by President Obama on April 12, will allow small
US. Companies and syndications to go to the Internet to raise up to $1 million
over successive12-month periods from small investors in “CrowdFunding”
WHEN: Not in effect yet, the Jobs Acts gives the
SEC 270 days to issue “Final Rules” for CrowdFunding Offerings. But the time to gear up for this new method
of raising money is now…!
Investors with Annual Income or Net Worth under $100K can invest up to 5% of
their Annual Income or Net Worth, up to a maximum of $2,000 per year.
with Annual Incomes or Net Worth above $100K can invest up to 10% of their
Annual Income or Net Worth, up to a maximum of $100,000 per year.
WHAT: Common Stock, Syndication Units and other
Securities can be sold to raise capital for specific Companies with Business
Operations. The Securities will be
restricted from public resale for one year (and perhaps other restrictions if
adopted by the SEC).
HOW MUCH: $1,000,000 through your CrowdFunding Offering
over any 12 month period. (it’s a look
back rule; you can keep raising money until you accept that last dollar which
puts you at $1,000,000 raised, when measured over the proceeding 12 months).
may be able to continue to raise money through a concurrent Private Placement
Offering, but take care here, we’ll have to see what the SEC rules)
HOW: A Public Offering Over the Internet….!
will be required to use either a Registered Broker or a Registered Funding
you use a Broker, the Broker can go out and recommend your securities and
solicit purchasers for your securities.
Using a Funding Portal will likely
be cheaper, but the Funding Portal can not solicit purchasers or recommend
The disclosures posted on the internet will have to be posted in final
form for 21 days before funds can be accepted.
. A Target Offering Amount will be used, and must be reached before any
of the sales proceeds from investors can be accepted.
Your posted materials will have to include a Business Plan; Use Of
Proceeds; Target Amount and Deadline to Reach the Target; Ownership and Capital
Structure, and a LAST LOOK once the Target is reached which allows investors to
change their minds.
You will also have to provide
Financial Information for your Company (Management Certified for raises under
$100K, “CPA reviewed” in the case of raises up to $500K, and Audited for raises
FUNDING PORTAL: A “New” “SEC Registered” Entity created by
the Act, whose business will be acting as a "Funding Portal" Site through which prospective investors
can obtain and review information about your Company and Business, confirm their qualification to invest, and
then place their investment in your Company.
Funding Portal may not solicit purchases, offers or sales to buy your
securities, and is precluded from giving any investment advice or
recommendations to those coming to the Portal Site.
will be able to publish a Tombstone Ad directing prospective investors to the Portal or Broker Internet site, but you can
not otherwise advertise your offering, nor advertise its terms.
Sky Notice filings may be required in your Home State,
and the State (if different), where 50% or more of the investors reside, but
the Act pre empts other states from piling on additional fees and filings.
will have to file Annual Reports and Financial Information (the Rules will be
drafted by the SEC)
WHO CAN’T USE: Investment Companies, Foreign companies, Reporting
Companies under the “34 Act, and perhaps others the SEC decides to exclude)
SECURITIES LAW ADVICE. Everything
you publish about your Company and your offering is subject to the Fraud
standards of Federal Securities Laws, and you, your officers, directors and
likely your controlling shareholders, will be liable for damages resulting from
lost investments where there have been
material misstatements, or omissions of information necessary to make
what was said not materially misleading.
will need seasoned securities law counsel to help you carefully draft your
Company materials. Call if you would
like further direction or legal advice on how to take advantage of this new
Capital Raising Opportunity.
Davis (direct: 213–400–2007)
Law Offices of Davis & Associates
Securities, Corporate And Business Lawyers.
the Law is new, and because the SEC has still to make Rules implementing its
various provisions, the above represents a best guess guide of what many of
the CrowdFunding Rules will look like.
This partial Summary should not be taken as complete, nor as necessarily
correct in all aspects, and it is qualified in its entirety by reference to the
text of the Act, and to the Rules ultimately adopted by the SEC which implement
the Act. In all cases consult with Legal
Counsel before preparing a CrowdFunding Offering)
Posted from :
GRAND JUNCTION, Colo (KKCO) It allows start-ups to raise money for their business or product. It's also an opportunity for investors to own a part of businesses. The way it works it you just go to a "crowd-funding" site such as "kick-starter." Then you find the business you'd like to support and make a donation. The Grand Junction Business Incubator is trying to raise awareness of "crowdfunding," and get more businesses to use it in our area.
"Hopefully one of the outcroppings of this is we'll actually have a list of people we can go to for our people who are trying to raise capital and grow their companies. Generally to start a business, you would do boot-strapping; your own money, or friends and family. Once you got to a certain point, and people have a great idea or ability to run a company, they're trying to find a way to get it off the ground; so people are looking at any venue they can, any way to do it. Like anything, you've got to be educated; because there will be fraud, no question. There will be fraud and abuse, so you've got to be smart about it; talk to people; make sure you check all your resources out before you spend any money, and just be smart about how you navigate it, but it's gaining traction absolutely," says Jon Maraschin, Executive Director of the Grand Junction Business Incubator.
Senator Michael Bennett will be visiting the Grand Junction Business Incubator Friday, July 20th at 8am to talk about crowdfunding. Doors open at 7:30am. The free event is open to the public. For more information on the event and crowdfunding, contact the Grand Junction Business Incubator at (970) 243-5242, or www.gjincubator.org.
To learn more about crowdfunding, copy and paste the following link to a Wall Street Journal article in your browser.
Equity Crowdfunding Portal EarlyShares.com Plans Nationwide Educational Roadshow
--Will Hit 24 Cities in 24 Weeks --First Stop TechWeek Chicago, June 22 To Co-Sponsor Popular Start-Up Competition --Winnings Will Include Up To $100,000 In Cash and Prizes As Well As The Opportunity to Raise $250,000 on EarlyShares.com at No Charge
MIAMI, June 18, 2012 /PRNewswire via COMTEX/ -- EarlyShares.com, the premiere Portal for Equity Based CrowdFunding, announced today that it will be going on a national roadshow by visiting 24 major cities in 24 weeks aimed to educate and raise much needed awareness about the JOBS Act and the benefits of equity based crowdfunding.
EarlyShares.com goal in each city is to bring this to the attention of the American people at the local business and entrepreneurial level in an informing, engaging and easy to understand way. They want to help everyone understand how to make this new form of investing work for them.
EarlyShares.com's roadshow begins in Chicago, Illinois on June 22nd where they are co-sponsors and participants in TechWeek, a week-long technology event. At the conference, EarlyShares is co-sponsoring TechWeek Launch, a start-up competition where one winning company will receive up to $100,000 in cash and prizes from conference sponsors. The winning company will also have the opportunity to raise an additional $250,000 on EarlyShares.com at no cost. That means simply that EarlyShares.com will waive all success fees (approx. $15,000) . Further, EarlyShares.com co-founder Maurice Lopes will also participate in a panel discussion on crowdfunding along with four other esteemed industry experts including Bill Hubbard, JD CPA, Director Chicago Chapter NLCFA (National Crowdfunding Association) who will provide a local perspective on crowdfunding; Sara Hanks, JD, Co-Chair of SEC Regulatory Committee and CEO at Crowdcheck who will cover the due diligence aspect of crowdfunding; and Douglas S Ellenoff, JD, Partner at Ellenoff Grossman & Schole LLP who will cover the legal aspect of crowdfunding.
"TechWeek Chicago is a great way to kick off the roadshow. The major 5-day event allows startups to gain valuable market awareness, and we're excited to be there and provide crowdfunding education," states Lopes.
Other cities currently lined up are StartUp Weekend (San Antonio, TX) on July 20, JOBS Act Investment Summit 2012 (Santa Clara, CA) on July 25, and New York City for eLuminate Network's TM Pitch CrowdFunding Conference 2012 on July 30th.
Formed in 2011, EarlyShares.com is the leading online equity crowdfunding portal. The company has created a secure, user-friendly platform to connect Entrepreneurs and the new investor class, average Americans. For entrepreneurs, EarlyShares provides a cost-effective way to fund their startups or expanding businesses. For average Americans, EarlyShares is a way to support great ideas and create new jobs by investing as little as $100 in companies they see potential in.
Copyright (C) 2012 PR Newswire. All rights reserved
posted from :
By Ilan Moscovitz and John Maxfield
On June 27, 2012, The Motley Fool electronically submitted the letter reprinted below to Secretary Elizabeth M. Murphy of the U.S. Securities and Exchange Commission. We hope these proposals will help protect ordinary investors.
Dear Ms. Murphy,
As individual investors, we are concerned that the JOBS Act lowers the bar for the vast majority of companies going public and re-exposes Americans to some of the worst financial abuses in recent memory. We believe it is incumbent on the Commission to mitigate these abuses and protect the integrity of our capital markets.
To this end, please consider the following recommendations that expand on our senate testimony. The first section contains our recommendations associated with Title III of the JOBS Act -- the creation of a crowdfunding market. The second section contains our recommendations related to Title I -- the exclusion of "emerging growth companies" from the prevailing regulatory regime. The third section contains our recommendations associated with Title II of the JOBS Act -- the removal of Regulation D's general solicitation ban for Rule 506 offerings.
I. Title III Recommendations -- Crowdfunding
In principle, we're not opposed to crowdfunding. However, the opportunities for misuse and abuse are enormous due to the inherently speculative nature of start-ups, as well as what will certainly be weaker accounting scrutiny and corporate governance.
As the SEC designs the rules governing the crowdfunding market, it will need to focus on investor education; liability and accountability for intermediaries, issuers, and key persons; clear and comprehensible disclosure; and prohibitions on scams.
No matter which figures you look at, the failure rate for start-ups is high. According to Harvard Business School, 30% to 40% of start-ups lose most or all of their money, 70% to 80% fail to meet projected returns on investment, and 90% to 95% fail to meet declared projections.B. Investor education
As the statute makes clear, brokers and portals must verify that investors understand the risks of investing in crowdfunding.
Kate Mitchell, former managing director of the National Venture Capital Association and head of the IPO Task Force, recently noted that 40% of her venture capital investments lose their money, 40% basically break even, and only 20% make money. Crowdfunding will presumably have a lower success rate than Ms. Mitchell's fund, given that, among other things:
- crowdfunded companies are far earlier in their development life cycle than venture capital investments,
- many of the best ideas will already have been poached by venture capital firms,
- non-professional individual investors may not have the opportunity or expertise to conduct venture-capital-level due diligence, and
- criminals are obviously aware of No. 3.
Title III charges the Commission with designing a quiz that would be made available by portals or brokers that investors would need to pass before investing in crowdfunded ventures. Among other things, investors would need to demonstrate that they understand the rate of start-up failures and the risks inherent to crowdfunding:
This suggests a different, and more involved process, than simply checking a box ostensibly verifying the reader has reviewed a series of terms and conditions. There should be several multiple-choice questions tailored to testing whether prospective investors understand the nature of crowdfunding risk, the potential for fraud, their legal rights and issuer responsibilities, and the probability of losing the entirety of their investment in speculative, early stage ventures, among other things.
C. Liability and accountability
If crowdfunding is to succeed as a start-up funding mechanism rather than as a backwater for hucksters and frauds, the Commission will need to ensure that there is sufficient transparency, liability, and accountability such that quality issuers are distinguishable from low-quality issuers.
A few examples:
- Background checks: Sec. 4A(a) requires brokers and funding portals to obtain a background �check and a securities enforcement regulatory history check.
While obtaining these checks is an important step, the information could be even more effective at weeding out scammers if the Commission requires brokers and funding portals to prominently display the results of those checks, insofar as the information discovered bears on the honesty of the individuals checked. (We don't care about speeding tickets.)
- Crowdfunding history: Quality leadership is vastly more important for the fate of small companies than large ones. What's more, crowdfunding scammers are vastly more likely to repeatedly escape prosecution and regulatory enforcement than those at the small-cap level, given their lower profile and the smaller amounts of money involved.
The Commission should therefore also require brokers and portals to perform and disclose checks on the crowdfunding history of officers, directors, and people holding more than 20% of outstanding equity of the offered securities.
"History" here means their record of crowdfunded issues and each issue's status: proposed (pending), proposed (dropped), active (with link to most recent financial performance report), and terminated (with final shareholder return). Such a check shouldn't be too expensive, as the crowdfunding intermediary industry will have already collected all the data it needs.
This is important for allowing investors to have the material information they need to make informed investing decisions and for weeding out and apprehending repeat scam artists. Brokers and portals could flag suspiciously prolific individuals to potential investors and enforcement officers. It's one thing to seek funding for a variety of ideas -- it's another to raise $300,000 for 20 different ventures and continually "lose" the money.
- Residency requirement: In order to ensure access to legal recourse and enforcement actions, the Commission may need to require that all issuers' officers, directors, or holders of more than 20% of outstanding stock be residents or citizens of the United States, or of some country where the Commission would be able to easily pursue enforcement actions.
D. Prospectus disclosure
The Commission should create and mandate a simple, uniform, easy-to-understand yet comprehensive template prospectus that is similar in principle to the mutual fund industry's summary prospectus.
Doing so would streamline the filing process for issuers, most of whom won't be able to afford a team of lawyers. A web-based template filing would also make it easier for portichs to collect and display the key information about each issuer that investors would need to know when screening for and analyzing issuers.
Among other things, the prospectus should disclose: issuer and individual backers' identities including executives, directors, and persons holding more than 20% of outstanding equity; business plan; financial statements (if applicable); proposed valuation; amount being raised; related party transactions; executive, director, and employee compensation; and any payments made for lead generation and solicitation (if applicable).It would also partially alleviate the need for the Commission to create a slew of rules that would otherwise be necessary to contain the potential for scams to proliferate in the fine print. It would clearly be abusive, for instance, for a start-up to raise $1,000,000 in exchange for 0.001% of its shares. In the absence of checks provided by underwriters and financial media, it would be relatively easy to scam investors in the crowdfunding market by hiding such information in the fine print of a 100-page legalistic prospectus.
In short, creating and mandating a fill-in-the-blank prototype (and providing an example of a good prospectus) would streamline the crowdfunding process by ensuring that issuers know what information they need to provide, help portals and brokers comply with their oversight role, protect investors, and save the Commission from having to consider and ban every possible scam that the traditional IPO process would have ordinarily caught.
E. Wanton dilution and other tantalizing scams
Given the lack of traditional corporate governance enforcement mechanisms, the Commission will need to ban certain abusive practices outright.
Here are three examples, though there will undoubtedly be more:
- As noted earlier, it would be possible for an issuer to raise up to $1,000,000 in exchange for only a negligible ownership interest. While the statute sets a maximum aggregate issue amount at $1,000,000 per issuer and requires disclosure of valuation, it does not specify a maximum issuer valuation. The Commission will need to set one -- perhaps at something two, five, or 10 times the aggregate issue limit -- and each issuer's proposed valuation should be prominently communicated to potential investors via the prospectus.
- Similarly, unscrupulous issuers might sell a special class of shares to the crowdfunding public that they eventually dilute in future offerings, leaving insider shares undiluted. Unlike venture capital firms, crowdfunding investors won't have the ability to negotiate protection from potentially abusive dilution. The Commission should therefore implement a rule to protect investors from excessive dilution.
- Unsavory issuers may seek to pay outsized salaries, bonuses, dividends, or other perks to officers, directors, or outstanding shareholders. Such payments could be an effective and legal means of embezzlement.
What's more, due to the limited liquidity of crowdfunded shares, even if a reasonable salary is disclosed in a prospectus, investors will have little recourse if the issuer changes its compensation in later years, say, to the entire equity of the company.
In light of the unique features of the crowdfunding market, while we understand that the SEC is traditionally a disclosure-based organization, we believe it should set a maximum aggregate compensation amount for officers, directors, and dividends at some percentage of the issuer's tangible book value.