REFLECTIONS ON A CONVERSATION earlier today with a very knowledgeable friend, lawyer and entrepreneur. He's got an early, development stage company he is putting together and beginning to explore how best to go about fundraising. At this point he is exploring how best to present his venture to investors.
Crowdfunding was an option he wanted to explore but we quickly put that aside because of the amount of funds needed and the requirements of classical non-accredited investor crowdfunding - relatively small investments, numerous investors, a total funding limitation too small for this company, and ongoing reporting requirements. Even if you could raise enough money, would you really want scores of unaccredited investors to deal and communicate with in an early stage technology company? We both thought not.
From my perspective, this type of crowdfunding is not suited for early stage technology companies. Funding for a dry cleaning establishment perhaps, but even there I would want to explore other alternatives first.
The more interesting part of the JOBS Act that created crowdfunding for the masses was something largely overlooked by the press. Buried in the Act's provisions was an enabling amendment to Regulation D that governs private fundraising. The amendment authorized private companies to make public solicitations in exempted accredited investor fundraisings for the first time if they met a higher standard of vetting the accredited nature of their investors.
The result of this has been the proliferation of new "crowdfunding" web sites that provide a method for conducting a non-accredited investor offering but also, and more importantly, aggregate pools of fully vetted (under the new Reg D rules) accredited investors that can invest without the dollar limitations of a non-accredited crowdfunding offering. If you are looking to raise more than $1.0 million, this opens the prospect of presenting to a pool of vetted accredited investors who might invest $50,000, $100,000 or more each to give the company a small pool of more sophisticated investors with higher average net worths.
This may or may not make sense for my friend. Time and the viability of other potential fundraising pathways will tell whether this or another path makes most sense when it is time to raise serious amounts of money.
The image is from the hall of tapestries at the Vatican Museum. Copyright 2015 by Clinton Richardson.
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Clinton Richardson, has been writing for decades. His critically acclaimed venture strategy books first appeared in 1987 and are now in their 5th edition. His Ancient Selfies is an International Book Awards Finalist and an eLit Award Gold Medal Winner. Ancient history and capturing photographic moments are among his passions. See his photo galleries at TrekPic.com.