I attended the fourth of the five Global Crowdfunding Convention (GCC) hosted by Ruth Hedges in Las Vegas. Due to Traklight, Evolve Law, and family commitments, I was only able to attend for Monday, October 17th.
Evolve Law member Douglas Ellenoff, Partner and Owner of Ellenoff Grossman & Schole LLP as well as iDisclose, spoke on Title II & III. Doug pointed out that we are dealing with securities law and this is not Kickstarter and Indiegogo. – it’s a heavily regulated industry ever since the Great Depression.
A couple of Definitions:
Title II – You can advertise your fundraising, but you can only raise money from accredited investors and you are responsible to ensure that they are accredited. Title II has been live for three years and it is starting to see traction.
Title III – Raise funds by debt or equity investment in companies from accredited and unaccredited investors, live as of May of this year.
Title II is beginning to be understood and used, unlike Title III, where many institutional investors want nothing to do with unaccredited involvement. Therefore, it may take longer than the three years that Title II took to take hold for Title III to be widely adopted. Although that said, stayed tuned on Forbes for a series on successful Title III raises.
The comment was made that the Title III Form C is not that onerous to complete; however, it will require some rule changes to raise the limit from $1M to $5M in order to make Title III viable. Some interesting research was presented in one panel that women and minorities raise more using crowdfunding than the traditional venture capital sources.
An interesting peek into the more mature Title IV offering, more commonly known as Reg A+, was given by Tim Andrews of Elio Motors, the first Reg A+ raise. To date there have been 140 registrations under the funding mechanism which is a mini IPO with a real prospectus. Reg A+ costs more than Title III and takes 75 to 90 days. In theory, you can raise $50M but fewer than 10 of the 140 have been successful.
The GCC conference brings together much more than the usual suspects in the crowdfunding industry. We heard from pioneers Slava Rubin of Indiegogo and Brian Camelio of Artist Share and recent success stories were shared by B Cavello and Jilliene Helman.
Slava Rubin commented that those that back projects on Indiegogo glimpse into the entrepreneurs’ world. As backers, they now know how hard it is to be an entrepreneur. Slava told the Indiegogo story which started in 2006, when Facebook was smaller than MySpace. He and co-founders thought if the internet is democratizing everything, why is acquiring money not online? Why not create a marketplace? However, government regulation was the dream killer of their original idea, which was equity crowdfunding. So, they tweaked their model to use donations instead. Indiegogo itself was rejected by 93 VCs when trying to raise money in 2008.
Indiegogo added in flexible funding based on feedback from backers, not just entrepreneurs. They started with all or nothing when Indiegogo launched in Jan 2008. Six months later, they received complaints from the people that GAVE money, the backers, “I wanted them to have the money and now you’re giving my money back – you just pissed me off.” It was surprise to the founders but they responded with flexible funding.
Brian Camelio went even further back in time to share the story of ArtistShare. When people were still freaked out by the prospect of Y2K in the late '90s, Brain was a professional musician who got into computer programming. He saw artists getting screwed over by producers and thought that the internet could leverage the situation to return the power to the artist by going directly to fans online. He put himself in the shoes of the donor. They wanted: their name on the record; to see the recording; or be part of the process. He started building ArtistShare in 2000 and launched in 2003 after doing all the programming himself. He confessed that the tech and the interface were horrible but people loved it!
Future of Industry
Doug Ellenoff predicted that it will take 3 to 5 years for Title III to grow. B Cavello talked about how much hard work is required for a campaign, so make sure that you go in with a good understanding about the level of effort.
Jilliene Helman of Realty Mogul had over one hundred coffee meetings when she was launching and she does not even drink coffee. She knew it would work when one morning they discovered that Jack, their first customer, wired $500K. No one knew Jack so she found his cell phone number and called. She knew her platform would work when he said, “I invested with you online because I do not want to have this phone call” and hung up. Access to commercial real estate without having to deal with people in person has taken off and will be huge.
Slava compared people scoffing at Title III now to how they were laughed at back in 2008. And Jilliene sees that everyone will move to technology as a platform. She has a tech company that deals in commercial real estate, not a real estate company with tech.
The overall theme from the day was focus on your story and make sure that it is authentic regardless of how you grow your company. Customer acquisition is the key to getting the full life time value from people so owning the customer is key. Therefore, crowdfunding and selling are alike. And yes, spread the word about all the crowdfunding avenues outside the converted group. #onwards.