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True equity crowdfunding just arrived, otherwise know as Reg CF. Boon or bust for entrepreneurs?

Regulation Crowdfunding, also known as Title III of the JOBS act, was adopted in May of 2016 as a way to reduce the regulatory restrictions thus making it less costly for companies to raise up to $1 million from both accredited and non-accredited investors. This means that companies who are looking to raise anywhere from $100,000 to $1,000,000 are now able to do so through FINRA approved crowdfunding portals. What are the potential risks and rewards for entrepreneurs?
Disclaimer: I am one of the first entrepreneurs to take this risk, having launched an equity crowdfunding campaign for my company this week.

29 Replies

Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Hey Adam... it'd be really, really awesome if you could share your experience here. We all have opinions on what's going to happen but not nearly as interesting as what's actually happening.
Michael Brill
0
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Having said that, I'm betting that the initial Title III portals are going to be disasters. IMHO, Title III's role is local/vertical/experiential/relationship-based investments with the bulk of the investments driven by factors other than traditional risk-adjusted capital return motivations. There are real opportunities there.

But the first Title III portals are treating these offerings like junior Title II offerings and that's not going to work. It'll be clear that these are bottom barrel investment opportunities from companies that couldn't raise money from "professional" investors... and most of the companies have no capability to market the deals so they will go unfunded.

Of course there will be exceptions, but unfortunately it'll take 12-18 months of a lot of investors' money to realize that Title III's role is enabling enthusiasts to get some skin in the game for companies they deeply care about.
Chia-Lin Simmons
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Chia-Lin Simmons Entrepreneur • Advisor
Ex-Googler; Co-Founder / CEO RedHelicopter; Founder LookyLoo
Will having more quality companies (ie. With founders who are known quantities) help? I see this as a much needed potential opportunities for those seeking to fund hatdware, for which it is reallybh a rd.to raise capital for in the early stages for the initial 5000 units outside of a Kickstart campaign.
Michael Brill
0
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Founders who are known quantities *and* with a successful Kickstarter will typically have easier access to capital than investment crowdfunding. However, this may be a good example of where Title III may make sense. If you had support for 5,000 units on Kickstarter, maybe you leverage that audience into investors...

...except you now now have a ridiculous cap table (Title III prohibits an SPV model so everyone shows up on the cap table) that will turn professional investors off. So now you've largely precluded larger scale investment in the future. Much problem.

eileen gittins
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eileen gittins Entrepreneur • Advisor
Founder and Executive Chairman at Blurb
Adam -- I have heard that one of the challenges with FINRA approved crowdfunding is that the company must communicate individually with each investor vs. the cohort as a group. In my experience as a three-peat CEO, investor management and communications take up a lot of time -- especially in the early days. If true, this could be a real burden....do you have any intel on this one?
Irwin Stein
0
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Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
Congrats. Mr Glickman. I wish you well and hope that you are successful raising the funds that you seek. I agree with Mr. Brill. Title III is not going to be the panacea that the crowdfunding industry projects. I am advising clients to stick with Reg D offerings under Title II to accredited investors. I predicted some months back that a lingerie company would be the easiest to crowdfund because the product catalogue would draw the most attention. I think that a condom company has a good chance of success as well.


Adam Glickman
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Adam Glickman Entrepreneur
CEO & Co-Founder at Graphic Armor, Inc.
As a career entrepreneur who understands the great value of peer to peer sharing and support (EO), I would be happy to share my experiences over the course of the campaign. There is no doubt we are in uncharted waters.

Eileen, I am not aware of any Title III requirement that says we need to communicate with each investor individually. Lord help us if there is ;-)

Michael Brill
1
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Adam, investor communication should be managed by the funding portal... but, yes, you have to treat each investor as an individual.

Eileen (Hi Eileen!!). I think what you're referring to is the exclusion of any type of special purpose vehicle that aggregates investors into a single cap table entity. Title III disallows investing in "investment companies" such as these SPVs. While the funding portal should handle the broadcast communications to investors, you still have to (should) reply 1:1 if investors start asking questions.

The bigger issue is that you are probably killing later stage professional financing because now you've got a messy cap table with tons of investors that you need to herd to make anything happen. Imagine what happens when a venture investor wants to renegotiate some right with 500 investors. Maybe you can get around it by not giving the Reg CF investors much in the way of rights, but that just cements the issue that these investments are for suckers.

To be sure, I'm bullish on Title III - but for lifestyle businesses whose investment returns combine financial (typically based on debt and rev share, not equity), product and experiences.

Adam Glickman
0
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Adam Glickman Entrepreneur
CEO & Co-Founder at Graphic Armor, Inc.
Michael, I agree with your statement,

"IMHO, Title III's role is local/vertical/experiential/relationship-based investments with the bulk of the investments driven by factors other than traditional risk-adjusted capital return motivations. There are real opportunities there."

Part of our strategy is to appeal to potential investors who care about the issues of safer sex and sexual health. Sexually transmitted infections are at an all-time in the U.S.Graphic Armor produces the world's first FDA-cleared condoms that feature photo-quality custom print right on the latex. Our company's mission is to change the way people look at condoms by changing the way condom look and we have invited others to join us through our Ref CF campaign.

I believe that other cause related companies and the social entrepreneurs that drive them will also have opportunities to conduct successful equity crowdfunding campaigns by appealing to targeted communities that share their passion and values. I think we can all agree, these are very early days and how this plays out over time is anyone's guess.
Michael Brill
0
0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
I certainly wish you lots of luck Adam. You're definitely a pioneer and clearly, er, passionate about what you're doing!
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