Big Red Car here. Glorious day in the ATX (Austin, Texas for you Yankees). Sunny and crisp.
The Boss was out early for a meeting and on the way back was mumbling about crowdfunding. The Boss has raised a lot of money in his business career and is intimately familiar with the process. For every entrepreneur it is a baptism of fire.
The Boss wrote about it here and it is a good idea to review those comments.
The Rules as They Exist
Raising capital — particularly for a startup or a new company or a small business — has been a very highly regulated undertaking. It is, at the end of the day, an issuance of securities whether in a public manner or privately. The rules on the solicitation of investors have been very complex, intimidating and serious. This is an area that spawns gobs of litigation.
Done right, it requires the involvement of lawyers, accountants, broker dealers and a lot of disclosures and documentation. It is not easy. It is not for the faint of heart.
If the money is being raised for a startup or a new business or a small business the first pragmatic problem is funding the undertaking itself. You will find that those lawyers, accountants and broker dealers will not work for free.
In doing this on a private basis, there is the necessity to ensure that you offering is organized, well written and complete.
And it has to comply with a lot of securities law. The Big Red Car is not giving anyone legal advice — ever — but you are going to want to sit with your lawyer and discuss Regulation D. It can be done but it is not easy.
But there is a bit of change afoot. America is in desperate need of jobs and start ups, new companies and small business may be one of the only bright spots on the horizon. If we can get it done.
What Has Changed
In April 2012, the President signed the JOBS Act — Jumpstarting Our Business Startups Act — which provided for a number of changes. The Big Red Car does not want to explain them all to you but the big ones were:
1. Emerging growth companies can raise $1,000,000 per year to fund their growth. This is in essence public venture capital.
2. Changes were made to the public solicitation requirements of Regulation D. Bit of arcane jargon here.
3. The changes included the ability to publicly solicit — ON THE INTERNET — accredited investors rather than having to make private solicitations of accredited investors — generally folks with $1,000,000 net worth not including their residence and with incomes of $200,000 if single and $300,000 if married.
4. In addition, you are not required to use a broker dealer (and pay their fee) if you are directly soliciting funds to be used by you or your company.
These are monumental changes and because of this the United States Securities and Exchange Commission has been wringing their hands with draft rules and has missed all of their deadlines to finalize the rules. This is like a land rush waiting for the flag to go down and turn loose those ponies and wagons.
This is the future — Internet and social media — smashing into the Old Economy. There will be a huge explosion and the fuse has been lit.
The BIG Buzzword
The big buzzword which encompasses these changes is CROWDFUNDING. A word I have already begun to hate right up there with “spot on” and “the Millenials”.
Hate it, does the Big Red Car and The Boss.
1. Crowdfunding suggests a crowd of investors who previously were shut out of the rigged game that is Wall Street.
2. Crowdfunding suggests a new tier of portal companies who will facilitate this like investment banks raise money for large public companies.
They will be started by, owned by and operated by young Turks who cut their teeth as financial analysts at big investment banks.
You will not be able to swing a cat without hitting some young stud who spent a couple of years at JP Morgan crunching numbers for the big dogs.
3. Crowdfunding suggests a crowd of startup companies who were unable to tap into venture capital or other pooled growth funds. Maybe because their business model was crap.
4. Crowdfunding suggests a venture capital competitor which would expose deals to the public which were previously the exclusive market of venture capitalists.
The real crowd should be experienced businessmen who are operating legitimate businesses or starting up legitimate businesses who will comply with the laws and will be stewards of the public’s money. This could be a huge boon for small businesses. This is where The Boss’s focus currently is.
How Will this Really Work?
Nobody really knows how it will work but the formative work has begun. There are hundreds of portal companies out there just waiting for those SEC rules to be finalized. They are lying in the weeds in wait for the land rush to begin.
In the meantime, the SEC is investigating about 200 of them who have allowed their youthful exuberance to get the better of them. Rules? We don’t need no stinking rules! [pullquote]Rules? We don’t need no stinking rules![/pullquote]
There is some good organizational work out there including from such organizations as:
The National Crowdfunding Association – follow the link; and,
In addition, there are a lot of portal firms who are standing up a website in anticipation of the SEC getting their Rules finalized. A couple The Boss likes are:
1. SeedInvest — just likes their website design and is otherwise completely random; and,
2. Microventures in Austin, Texas run by Bill Clark who is a new friend of The Boss. Good people. Good businessman.
Microventures is an Old School/New School broker dealer with the appropriate licenses to operate both pre- and post-JOBS Act. The Boss listened to an investment offering earlier this week sponsored by Microventures and it was first rate. Microventures has already proven their model and is way down the track.
So what does the Big Red Car and The Boss predict is going to happen?
1. So The Boss predicts this is going to be a huge boon to established businesses who can present a story of stability and a track record.
2. The Big Red Car predicts it is going to be the Wild West on the startup side as easily 75% of these companies will fail.
Remember that venture capital is a 1/3, 1/3, 1/3 business. One third the VC loses everything — tackle, worm. One third the VC gets his worm back. One third the VC catches a whale. That is if the VC is good.
These deals are going to initially be deals that the VC has passed on. They will have a failure rate higher than what an established VC would experience.
3. There will be a lot of happy horse hockey until the first returns start coming in and then the lawyers will have a field day.
4. This will be the financial equivalent of the derivatives debacle. After all, you have the same group of young suds with mousse in their hair as designed some of those obscene derivatives.
Big difference now is you have very little adult leadership and they are going to be allowed to harness the power of the Internet.
5. There will be some not inconsiderable fraud and the naysayers will have a field day.
Brazilian bikini wax anyone?
But, hey, what the Hell do I know anyway? I’m just a Big Red Car.