Now Anyone Can Invest In Startups If They Have The Stomach F

Now Anyone Can Invest In Startupsif They Have The Stomach For Itwhen

Now Anyone Can Invest in Startups—if They Have the Stomach for It When Oculus VR sold to Facebook for $2 billion in 2014, some asked: What if the people who backed the virtual-reality startup two years earlier on the crowdfunding site Kickstarter had received shares instead of T-shirts or VR headsets? They might have seen $100 turn into $14,000, says Richard Swart, chief strategy officer of NextGen Crowdfunding. Until the past year or two, the Oculus approach to crowdfunding was the only one available to everyday investors who aren’t wealthy. Federal law prohibited Kickstarter and similar platforms from offering shares to backers, so startups doled out merchandise or other perks instead. But the Securities and Exchange Commission recently finalized rules based on the 2012 Jumpstart Our Business Startups (JOBS) Act, creating an opportunity for so-called equity crowdfunding, which companies like Mr. Swart’s are eager to promote.

An Oculus-like success story is what the equity crowdfunding industry needs in order to take off, proponents say. However, most of the deals investors are buying into so far suggest such an outcome is unlikely anytime soon. Worse, it seems as though many investors will be unlikely to see any return on their investments at all: Some companies appear to be using this funding mechanism as a last resort, having been passed over by professional investors. Last week, Ronco Brands—the company founded by Ron Popeil, of Veg-o-Matic and Pocket Fisherman fame—announced its intention to file for what is colloquially known as a “mini IPO.” Permitted since June 2015, these are public offerings of tradable stock, but the companies can raise only up to $50 million.

Ronco has 22 employees, $17 million in debt, 2015 revenue of $9 million and auditors who have “raised substantial doubt” in securities filings about whether the company can continue to operate. Ronco’s chief executive says the company needs to acquire enough capital to leverage its half-century-old brand and grow. Then there’s video-streaming site VidAngel, designed to allow viewers to skip objectionable content in Hollywood films. The company raised more than $10 million from 7,554 customers in December 2016. The mini IPO was pitched as a way to fund VidAngel’s legal battle with movie studios that say the company is illegally streaming their movies.

Soon after the fundraising round closed, a district court judge issued an injunction to shut down VidAngel’s streaming of studio films. Meanwhile, the company is developing original content such as “family friendly” stand-up comedy. Or take Elio Motors, maker of a three-wheel car and the first company to launch a mini IPO under the new rules, in November 2015. The company probably couldn’t have survived without the $16.9 million it raised through equity crowdfunding, founder and CEO Paul Elio says. It has helped open doors to bankers and traditional sources of private equity, he adds. None of them has committed to the additional $300 million the company says it needs to start production, however.

One of the highest-funded projects in Kickstarter history is The Coolest Cooler, which has raised more than $13 million on the site. Then it attempted in March 2016 to raise equity crowdfunding via the site CircleUp from accredited investors, or those with more than $200,000 in income or net worth of at least $1 million. This led to negative press, and the listing was pulled. The Coolest Cooler “weren’t a fit for our platform,” a CircleUp spokeswoman said. The startup, which didn’t respond to requests for comment, still hasn’t shipped coolers to all of its Kickstarter backers.

Mini IPOs are allowed by the JOBS Act’s Regulation A+: Participants can raise up to $50 million, and the stock is immediately tradable. Another part of the JOBS Act, Regulation CF (for “crowdfunding”), allows companies to sell up to $1 million in shares which must be held for at least 12 months. These smaller offerings, possible since May 2016, are increasingly used by early-stage startups, often in combination with product preorders. Darren Marble, CEO of CrowdfundX, which markets equity crowdfunding deals including Elio’s mini IPO, says he is worried about many of these offerings.

“We probably reject 90% or 95% of the deals directed to us,” he says. “I think the vast majority of [companies] choosing [mini IPOs] are inherently poor fits for this regulation.” Both sets of rules allow anyone, regardless of income, to invest. But Regulation CF has very stringent caps on the size of the investments, segmented by investors whose net worth or income is less than $100,000, and those whose income or net worth is higher. For Regulation A+, the cap is 10% of a person’s net worth or income, whichever is greater.

“It’s very early,” says Slava Rubin, cofounder and chief business officer of crowdfunding site Indiegogo. Through a partnership with equity-crowdfunding platform MicroVentures, Indiegogo has been offering shares for less than a year. To date, 11 equity-based projects have been fully funded, including an at-home beer-tap startup called Fizzics, a smart connected ball from Play Impossible, a movie called “The Field Guide to Evil” and a food truck that serves “seasonal” grilled-cheese sandwiches. The average investment on Indiegogo’s equity platform is over $500, Mr. Rubin says. The SEC has been careful—some critics say excessively careful—in crafting investor-protecting regulations around equity crowdfunding.

But the fact that the rules are looser than conventional IPO regulations means there will be fraud, says Josh Brown, CEO of financial planning firm Ritholtz Wealth Management. “I’m not against [these rules],” Mr. Brown says. “The problem is some [investors] are going to get f—ed. Without a doubt.” Some Wall Street traders, he adds, call the JOBS Act the “Just Open Bucket Shops” Act, a reference to the fraudulent brokerage firms whose high-pressure sales tactics were in part responsible for the stock market crash of 1929 and the formation of the SEC.

It’s clear that the original intention of the JOBS Act—to encourage formation and growth of new businesses in a world in which the stock market is actually shrinking—was a good one. What isn’t yet clear, and won’t be clear for some time, is whether everyday investors will be savvy enough to sort the good deals from the bad. The government shouldn’t “set loose a new generation of wolves of Wall Street who can sell people stories and a dream and leave people holding the bag,” Mr. Brown says.

Paper For Above instruction

In recent years, the landscape of startup investment has undergone transformative changes driven by legislative reforms, technological advancements, and evolving investor attitudes. The JOBS Act of 2012, particularly its provisions allowing equity crowdfunding and mini IPOs, has opened new avenues for everyday investors to participate in startup funding traditionally reserved for wealthy or institutional investors. These developments aim to democratize startup investing, promote entrepreneurial growth, and stimulate economic innovation. However, alongside the promising opportunities arise significant risks, including potential fraud, inadequate due diligence, and the challenge of discerning viable investments from speculative or failing ventures.

This paper examines the implications of the JOBS Act’s regulatory environment on startup financing, analyzing both opportunities and pitfalls for ordinary investors. It explores case studies like Oculus VR, Ronco Brands, VidAngel, and Elio Motors, highlighting how these entities leveraged new funding mechanisms such as mini IPOs and crowdfunding platforms. While these cases demonstrate the potential for startups to raise capital efficiently and broaden their investor base, they also reveal the risks associated with insufficient vetting and the prevalence of companies using crowdfunding as a last resort rather than a strategic growth tool.

The democratization of investment through regulations like Regulation A+ and Regulation CF has ostensibly empowered small investors to participate in startups with relatively modest capital. Nonetheless, the regulatory caps and the early stage of this ecosystem mean that the quality of deals is highly variable, with many offerings possibly unsuitable or risky for typical investors. Critics argue that the loosening of regulations increases the likelihood of fraud and exploitation, echoing historical issues similar to the dark days of unregulated securities markets prior to the SEC’s formation.

Despite these concerns, proponents maintain that properly regulated crowdfunding and mini IPOs can invigorate innovation and provide substantial returns if investors approach these opportunities with diligence and caution. It is essential, therefore, for investors to develop a robust understanding of the inherent risks, scrutinize startups' financial health and business plans, and recognize the limits of early-stage investments. The role of regulatory bodies becomes crucial in balancing access and protection, ensuring investor confidence without stifling entrepreneurial progress. Ultimately, the success of this democratized funding landscape depends on robust investor education, transparent deal vetting, and vigilant enforcement against fraud.

In conclusion, the evolution of startup finance from private funding to a more inclusive capital-raising ecosystem presents significant opportunities but also substantial risks. The balancing act between fostering innovation and protecting investors will determine whether equity crowdfunding and mini IPOs become sustainable drivers of economic growth or sources of widespread financial loss. Future regulatory developments and market maturity will be pivotal in shaping the role of small investors in the startup economy.

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