[Transcript] Crowdfunding for Equity

Crowdfunding for Equity

Roger Royse:   

Good morning. This is Roger Royse, from the Royse Law Firm. I want to welcome you to Crowdfunding for Equity. Today’s webinar is going to discuss the JOBS Act, generally crowdfunding, raising money through the new crowdfunding rules. We’ve got a great panel put together for you this morning to discuss the Crowdfunding for Equity programs, especially in light of the new rules that were just proposed as an Act and then finalized last month.

Before we start, a few housekeeping items. I’d like to remind everybody that this is part of the Royse Law webinar series. We’ve had programs on health tech, fintech, AR, VR, artificial intelligence, and we’ve got programs coming up yet this spring on water tech next week and FIRPTA, Foreign Investment in US Real Property. Today the focus is not so much technology, the focus today … Maybe a little bit of technology as it relates to crowdfunding platforms, but how to raise money through these new crowdfunding rules.

We are recording this webinar, so you’ll be able to watch it later. You’ll find it posted on the Royse University webinar site. You’ll find it on our Royse Law YouTube site, and it’ll also be available for download as a podcast in the iTunes podcast store.

Briefly, you probably all know by now that it was about four years ago that the JOBS Act was enacted, signed into law by President Obama and it … You can go ahead and put my slides up Jeff. The idea was to provide additional access to the capital markets relax and reporting and disclosure requirements for private placements and certain other broader placements. It provided for additional exemptions from registration for the issuance of securities and changed a few other rules. Increased our 500-shareholder registration limit for public offerings and allowed significantly some general solicitation in what typically was what we call five or six offerings private placements.

The reason this is important again and why it’s back in the news, and you hear a lot about it is because as of last month of May 16th, regulations were finalized allowing for what we call Title III Fundraising or retail crowdfunding or crowd financing, which allows companies to raise a limited amount of funds from the general public. I’ll let our panel discuss that in more detail.

Currently, where we are being, we’ve got three, depending on how you categorize it, really three types of platforms. One is this Title III Crowdfunding in which non-accredited investors can invest through a portal or a broker in company’s relatively small amounts. We’ve got Title II, which is for accredited investors, but it allows companies to solicit and advertise. And then we’ve got Reg A, which are … Think of it as a mini IPO.

We have a group of panelists here that are expert in all three of these areas. They run their platforms, or they provide services concerning advising on how to do any of these.

Our panel consists … Let me just give you a rundown, and I’ll turn it over to our panelists. Gene Massey, he’s the CEO of MediaShares. He does quite a bit of consulting on these sorts of placements including Reg A+, is what we call Reg A+. Those are the mini IPOs He’s also CEO of the company QwikShares, which offers crowd financing in crowdfunding solutions for Reg A+ offerings.

Adam Hooper, he is the founder and CEO of RealCrowd. It’s a Y Combinator and venture-backed business. They found a way to use crowdfunding to invest in real estate. RealCrowd is one that you’ve probably heard about if you follow the real estate crowdfunding news at all.

Dara Albright is a very well-known recognized speaker, writer, and influencer on topics relating to market structure. She has a blog post. She’s a prolific writer and is very opinionated on the regulatory issues around new issuances, fintech, and crowd financing. I’m sure Dara will have quite a few ideas on where this is going and where it should go.

And then finally, Patrick Robinson is with the CircleUp. It’s the San Francisco Bay Area crowdfunding organization. They’ve got a little bit different approach on their platform. Patrick can talk about how CircleUp handles crowdfunding.

I want to remind the audience if you have questions during the program, you’ll notice that there is a dialog box, it says questions on your screen. I’m expecting a lot of questions here. I doubt that we’ll get through all of them, so ask them soon, and we’ll do our best. But go ahead and type your questions. At the conclusion of some short introductions and presentations by our panelists, we’ll go ahead and turn this over to questions.

If we can get to it today, we’ll have people follow up with you later, but I’d like to make this as interactive and responsive a discussion as possible. So that, Gene I’m going to let you go ahead and introduce the topic and maybe give us an overview of where we are.

Gene Massey:

Sure, first of all, Roger I want to thank you for being part of this. You’re a distinguished law firm. Your real experts in this area and I’m grateful to be included in the stellar lineup today of experts in this field. My first slide is about the history of crowdfunding. I don’t want to disappoint anybody, but it’s not new. It started in 1606 when the Dutch East India Company first issued stock.

They decided, “Well, let’s get a bunch of investors to invest in something.” That was a very successful company for a couple of hundred years. Then, of course, everybody knows about the creation of the New York Stock Exchange with the Button Agreement in 1792. At that time if you wanted to sell stock, you basically either mailed somebody a letter with an offer in it or you walked across the street, knocked on their door, and you tried to sell them some stock. So, it was a primitive means of communication to shareholders of an offer.

And then the ticker tape came in with the telegraph. That was a truly transformative event because at the time, many companies were actually out of business in some places in the United States, and they were still selling stock in that company on the New York Stock Exchange because the communication was so poor at the time. The ticker tape was before the telephone even. It was the telegraph at the time and so they would … Very often companies would be out of business.

Then in 1876, the telephone came in. That allowed a person selling stock to call up somebody on the phone and sell them some shares and make a deal. Then probably follow up with the paperwork, but they could call up a whole bunch of people on the phone.

And then came the internet. This is what has happened. It’s not crowdfunding now, it’s internet funding, and if you think about it, what has happened, the birth of the internet allowed an issuer of stock to contact millions of people on the internet and sell their stock online. Then, of course, you had the birth of online brokerages.

And then an April 5th, 2012, the JOBS Act was signed, and that was created because everybody realized, “Wait a minute, we can get funding on the internet now.” As many people have said, that’s the best thing that’s happened to the securities business in 50 years. At the time, the JOBS Act was signed, we were working on many securities rules that we’re 50, 60 years old, and some still are by the way.

And so, we’re in the middle of a huge revolution in being able to reach enormous numbers of shareholders, potential shareholders on the internet and being able to expose your offering as an issuer to millions of potential shareholders. That is scary to the regulatory agencies. They’re afraid, “Oh my goodness! You mean somebody can post an offering on a website?”

There are all sorts of possibilities for fraud there. And as it’s turning out, the tremendous fraud that everyone was anticipating is not happening. My two favorite things about all the JOBS Act rules are Regulation D, 506(c), and Regulation A+, which is tier two of Regulation A.

Reg D allows us to solicit. Before this rule, you could not call up strangers and sell them your offering. You had only to contact people that you knew. And you could contact non-accredited investors, hence Regulation A, which is a modification of the old Regulation A, which now allows you to raise up to $50 million on the internet and sell shares to non-accredited investors. I’m sure the other folks will have many things to say about that so that I won’t go too deep into it

The thing about selling shares online is it requires two things. How are you going to market your offering to investors? Once you market the offering and they go somewhere on the internet to buy some shares, how does the transaction take place? That’s the essence of online share sales, is how do you market the offerings? And then once they get there to your website or to a portal that has many offerings on it, how do you transact it?

In marketing the shares, you have not eliminated the possibility of working with traditional brokers. Just because your offering is on the internet, you don’t have to eliminate brokers. Most of the offerings now, the issuers are working with brokers. But you are still using social media to advertise the offering, in addition to the brokers who market to their investors. This is a hybrid now.

The days of only selling your shares by a broker, calling up shareholders and the potential share purchasers on the phone, we make a joke, and we say that’s like going door to door vacuum cleaners. That’s just not there anymore. Everything can be done online now, but there are brokers that still call up people and sell the shares.

If you’re selling shares through social media, you’re using all the typical tools. You’re advertising on Facebook. You’re advertising on websites. You’re email marketing to your targeted lists of customers, fans, users, affinity groups. And you’re partnering with others who have an interest in your potential offering, and who have online communities.

Now, yesterday moderated a panel here in Los Angeles, and one of the issuers which are currently marketing his shares online was telling me that he tried three different advertising agencies that were not successful in marketing his shares. That’s a lot of money. It was difficult; he was not making sales. He finally got another agency, and he was spending $10,000 a month for the agencies fee, and $25,000 a month for the ad placements.

And so, he was spending $35,000 a month, and he said he was doing so successfully. So to market your shares, you’re going to have a budget. People call me up and say, “I want to make an offering,” and I say, “What is your marketing budget? How are you going to sell your shares?” That’s something that needs to be considered, and the other panelists will talk about that when we get to them.

But if we could go to the next slide and talk about the transaction. The transaction is not a simple as one would think because you need. First of all, you’re under very difficult FINRA rules. You’re selling stock on a website. You must abide by some pretty serious rules. The old way that it was being done was, someone would say they wanted to buy some shares and you would send them a subscription agreement, they would sign it and mail it back to you, and they would mail you in a check.

That might have been done electronically, but that issue was still … The shares were still held in a transfer agent. QuickShares works with the brokerage where it’s all … We work with Folio Institutional. Folio is a website that can tell you more about it. We work with Folio, and the shares are held in a brokerage account to start with. A person can open an account and have the shares transferred from an account to their account, so they’re not in a transfer agent, which then needs to move the shares later into a brokerage account. That has been a very difficult process in the past.

What we do is, we make it easy for an issuer to put a page on their website and sell shares. This can be on an issuer’s website or a portal. Most of the portals handle the transactions in-house. You’ll be hearing more about that later. But that’s about it for me. We’re a consulting firm. MediaShares is a company that helps issuers sell their offering. We do marketing. We help people with the transaction of the share sales by introducing them to the brokerages that will do the transaction on their website or their portal. That’s it for me, and so we can go on to the next panelist.

Roger Royse:   

Thanks very much Gene. I appreciate that. With that, Adam are you there and would you like to say a few words about RealCrowd?

Adam Hooper: I am and thank you for the opportunity to participate today. Gene, very good information there. I’ll probably cover some of the safe stuff and see if we can zip through these slides and keep some time open for Q&A.

A little bit about myself and RealCrowd. We started the company in early 2013, so we were one of the first two or three real estate crowdfunding companies that got going. I came from a long career in real estate. My background was on the joint venture equity side, so raising primarily institutional capital. We saw just a tremendous opportunity with this new regulatory environment and the ability to wrap it in a layer of technology. To bring efficiency and scale to distribution of these securities and also bring access to investors to participate. Next slide is just a quick kind of overview of what we do.

Online platform and our whole goal are to provide direct access to investors to these private real estate offerings. We don’t get in the way of forming any intermediary LLCs. As an investor coming into a deal on RealCrowd, you have a direct relationship with that sponsor. You own that underlying security directly. It’s not through a holding company or anything that we form. We just think it’s much more transparent and efficient to have that real direct relationship between the investor and the sponsor.

Next slide is just a little bit about some of the points of the Roger and Gene already touched on. Why is this happening now? Why are we seeing such a huge increase in crowdfunding platforms, both real estate our space, consumer products, startups, all different types of industries? The biggest catalyst for this was this regulation.

To date, all of the deals that we’ve been doing are in this Regulation D, Rule 506(c) space, which allows for the advertising of a private offering. Before the JOBS Act and the approval of Title II in September of 2013, you couldn’t sell a private offering. You couldn’t sell a security to somebody that you didn’t have a preexisting business relationship with. And so, September of 2013, that prohibition of advertising was lifted. As an issuer, you can now advertise to the public that you’re raising capital for a private offering.

Some additional restrictions come of that regarding accreditation. Investors have to be accredited, and you have to take some additional steps to verify that accreditation now. But the ability to change what’s always been a one on one conversation, to leverage the distribution potential on the internet, which is … In social media, as Gene was talking about, you take what’s always been a phone call, and now you can have that same conversation with potentially millions of people with a couple clicks of the mouse. That’s a pretty transformative shift in how you can distribute these opportunities.

Regulation A+ is a newer method of raising capital. I think we’ve seen the mid-30s. 34, 35 regulation A+ offering have been approved or at some stage of approval by the SEC, so a little bit newer than the Reg D. We see a pretty big opportunity in the real estate space. We’re in conversations right now with probably five or six different groups that are going to be launching Reg A+ opportunities.

That allows you to raise now up to $50 million from non-accredited investors. That was a big change. Again, prior Reg A rules allowed you to raise only up to $5 million, and it was in-trust state offering. You could only offer it to people in the certain states that you filed the registration in. Now, there’s a federal exemption with this Reg A+ so you can offer it in all 50 states to non-accredited investors. I think we’ll see a pretty big opportunity for that in the second half of this year.

And then Regulation Crowdfunding Title III of the JOBS Act just recently active just a few weeks ago. Not sure how much application that it will have in the real estate space. There’s a $1 million per year, per company cap. The size of transactions that we work on, don’t know if it’s going to be that impactful but, it would be interesting to see how that plays out.

The other side of that id the distribution as I’ve talked about. We’re seeing a lot more investors are just aware that this thing is even possible. There’s been a pretty big wave of press, and I’m sure Dara will talk a little bit about that. But, the mainstream adoption of what it means to be able to have access to these deals. Just the awareness within the public.

Then finally for investors, that third bullet point down there is the big key. It’s accessed, it’s providing investors that would have never otherwise been able to participate in these deals or even know that these deals were available through platforms like ours and some of the others out there. It provides access at a scale to people that just haven’t been able to participate before.

This is just a quick screenshot of what the platform looks like. Again, these are all Regulation D, 596(c) offerings, so these are available to the public. Anybody can go to the website right now at realcrowd.comreal, and you can take a look at all the live offerings. Typically, we like to have anywhere from four to eight offerings at a given time.

It’s enough to have some variety of opportunities out there, but not enough that it overwhelms potential investors and it keeps focus on a few at a time. The main platform is this menu of offerings. In the next slide, we’ll show a deal that we closed end of last year, earlier this year. This was a hotel redevelopment right on Market Street in San Francisco. Really good project. Great sponsor out of New York City. Really cool hotel. They’re going to renovate that brick building just above the street cart there.

So as an investor, you can come in. You can see the highlights of the investments. If you click on next slide, you can see more information about the project specifically. Who is the sponsor? Who’s the group that’s running the deal? The financials, the offering documents, ask questions directly to the sponsor whether it’s through webinar format or just pick up a phone and call him. Some of the sponsors still, as Gene mentioned in the phone world.

Ultimately, we want to give an investor enough information in this web experience to be able to decide as to whether or not they want to invest. On the next slide, we’ll see it’s a fairly straightforward process. We try to make it as low friction as possible to make that initial commitment, so just a few steps there. Once you make that commitment, on the next slide it’ll go into your portfolio, and that’ll then walk you through the next steps, which are going to be you providing your accreditation.

That’s a big thing, and maybe we’ll just take a second to talk about the accreditation side. As an issuer, when you make a general solicitation, everybody has to be accredited in the offering under Regulation D, 506(c). Historically you could rely on a check the box, self-certification from an investor that says, “I certify I’m worth $1 million,” or, “I make more than $200,000 to $300,000 of income.”

When you do a general solicitation, it doesn’t cut it anymore. The safe harbor for the SEC is a letter from an attorney, an accountant, a broker-dealer, or a registered investment advisor stating that that third party has taken steps to verify accreditation. We tie in with the third-party service to provide that.

As anybody in the audience, if you’re a potential issuer that’s one thing that you need to get comfortable around, is how is the platform that you’re using verifying that accreditation? Making sure that from a security standpoint … As Gene was saying earlier, you’re not going to do anything that’s going to blow up the offering as there is a fairly rigid set of regulations around issuing securities this way. In the dashboard again, as an investor you can see the process, get accredited, and documents, transfer funds and that’ll go in your portfolio, and you now own your percentage share of that asset.

Next slide is just a little bit about what we’ve done. Just under 80 transactions that we’ve been a part of. The total value of the real estate of those transactions is a little over $2 billion. Just under $100 million of equity has been invested into those deals through the platform. The largest capital raised that’s been on our platform is about $18.5 million. That was a debt fund that just relaunched on the platform again. I believe that’s the biggest if not the biggest offering that’s been raised through a crowdfunding platform here in the US. It’s that $18.5 million.

Next Slide it is a little bit of demographic information that we get from our investors. So, the average age is about 45, the mid-40s. Skews, a little bit younger, we’ve got Millennials that are much more comfortable investing through technology and early adopters. The ticket sizes on our platform I think are quite a bit higher than what you would anticipate seeing from a “crowdfunding platform.” Average investment for an individual asset, $65,000, $70,000 in that range. For a fund, it about twice that. It’s a little over $110,000. $115,000 is the average investment per investor.

Average net worth again, when we do the verification, people are providing that information. The average net worth of people that go that route is about $9 million. The average income is about $670,000, so it’s fairly affluent set of investors that are using these platforms. I think again; we’ve done a pretty good job of keeping the quality of real estate companies that we work with very high. I think that’s attracted a more serious investor set than what you might see for people that are putting in $2,000 to $5,000. That’s something that we take pride in, is the quality sponsorships that we work with.

I think that’s probably about all I’ve got. I think that’s about it.

Roger Royse:  

Thanks very much Adam. Great to see how successful you’ve been at this and how well this is going. You’re one of the stories of where crowd financing can work. Dara Albright are you there? Would you-

Dara Albright:

I am. Thank you so much, Roger for having me here today. Excited to be here and as one of the earliest voices advocating for crowd finance, I’m always eager to introduce this whole concept, this whole industry to new people. To show innovators and investors and even in many times conventional financial service providers how they could capitalize on crowd finance. Because there’s so much misconception about what crowd finances are, I usually like to start by illustrating what it is not.

If you could just to that next slide there. This is a cartoon that I usually start out with. It was published in The New Yorker a few years ago, and it depicts these two panhandlers begging for money with the caption that reads, “Remember, we’re not begging. We’re crowdfunding.” While I usually get a good chuckle when I show this slide, the truth is, this has nothing to do with crowdfunding.

If you turn to the next slide, you realize if you … Crowd finance is just like regular crowd finance except for one fundamental exception. Instead of capital coming from big institutions or government entity, it’s being raised by pooling small amounts of money from a large crowd of individuals. Crowd finance is nothing more than investing in and profiting from the innovation and ingenuity of our fellow citizens.

It’s what built America in the first place. It’s what gave the world some of the most important inventions in the history of mankind. Of all days, days like today especially illustrate the advantages and the importance of investing in one another. If you take a look at what’s happening today in our stock market, hear the UK declares its independence, and US stocks are tanking, even businesses with zero exposure whatsoever to European markets.

This is the repercussion of a global financial system that’s monopolized by traders who are completely detached from their investments. What we see today is, instead of being based and valued on fundamentals, US stocks are being priced based on the result of a vote that occurred thousands of miles away on a completely another continent.

What crowd finance does is it brings in a passionate investor to innovations. It brings in passionate investors to your business, and it changes the landscape. By doing so, what it does is rebalance capital distribution and ultimately will narrow the wealth divide. I think in its simplest explanation; equity crowd financing is nothing more than the rebalancing of capital from America’s corporate conglomerates and financial institutions to its entrepreneurs and its small retail investors.

That kind of ends the Kool-Aid portion of my presentation, but I’m sure most of you tuned into this webinar to understand and learn how to use crowdfunding to either start your business or enhance your business. I’ve prepared just a few remaining slides that will provide some guidance.

In the next slide here, what it does this compare the various crowd financing structures. I put this in there to kind of help companies understand which one is right for your business or your startup because there are so many different types of crowdfunding that are out there. Each one operates under a different regulatory framework, and each one has its advantages and its disadvantages. I put this slide together and the next one to help you determine which one is best for your business. What I wanted to do really is just contrast some of the various structures.

You have rewards-based crowdfunding, which many of you know as through Kickstarter, Indiegogo, it’s nothing more than a pre-product sale. It doesn’t entail any investing whatsoever and has no impact on a cap table. Anyone could do it. There are no offering thresholds, no filing or reporting requirements. It’s great for test marketing, brand building, attracting customers, engaging consumer demand.

What I do is, I created some acronyms for all of these different structures because people love and Wall Street loves acronyms. So, there’s ICOs, which are intrastate crowd finance offerings. You touched upon this in the earlier presentation, but this operates under the intrastate exemption. Operates under Rule 147, which allows a company that domiciled in a certain state that has its crowdfunding legislation to raise capital from its residents, from residents. This is great for local retailers or restaurants. We now have 33 states that have enacted its intrastate crowdfunding legislation. I’ve with them here.

Then you have what we were talking about earlier, the 506(c) exemptions, which allows for general solicitation of private offerings. I call them PPO, which is Private Public Offering. Some of the advantages are that there are no annual reporting requirements. Very limited costs. No offering limits. You get to have unfettered general solicitation. The only caveat is that investors must be verified that they are accredited. It’s up to the issuer to ensure that every investor is accredited.

To me, this is a good structure for a B2B price, but if you really have a consumer-oriented type of business and you want to reach out to your consumer base or grow your consumer base, you really want to focus on one of the other exemptions that allow you to go out to the masses. There’s what we call RACOs, which are the Reg A+ crowd finance offering, which allows companies to raise up to $50 million through an unaccredited investor. This is ideal I think for some more established businesses with a large customer or fan base.

The best example of a successful Reg A+ offering was the recent offering of Elio Motors, which is now trading on the Bulletin Board. They implemented what’s called the testing of the waters component of Reg A+ to go out and sort of pretest their offering and see how much demand that they would have before they officially took in money. It was a very successful offering. They raised about $17 million, and they did it primarily with their customer base.

Then lastly is Reg CF or Title III Crowdfunding, which is the latest crowdfunding structure to be implemented. This is kind of the … When it was first introduced back in 2011 and then signed into law in 2010, this is the intention. The unfettered ability to raise small amounts of capital from a mass audience of unaccredited investors. Finally, after a couple of years, it’s now live, but I would caution anyone out there.

You should keep in mind that Reg CF may change, probably it’s likely to change. There was a bill that was introduced by Congressman Patrick McHenry who introduced the original crowdfund bill. It’s called the Fix Crowdfunding Act. It recently passed Financial Services Committee just last week by an overwhelming majority. If that gets signed into law, they’re going to be some significant changes with Reg CF, but I think for the better.

This next slide just kind of shows what crowd finance is essentially doing. It’s establishing an entirely new path of capital formation for businesses from startup stage to large-cap stage. I believe that by following this new path, we’re ultimately going to be able to breed more proficient business and more productive economies.

Just to give you a real brief example of how it works, say you invent a widget, and you think it’s going to be the greatest thing since sliced bread, but before you take a dime of any investor money, through reward-based crowdfunding, you have the opportunity to test it out. You can use a Kickstarter or an Indiegogo type of platform. It gives you an ability to raise some capital to get the prototypes made for example, through people that might have an interest in actually purchasing that product.

It also gives you an ability to determine the viability of the product, gauge market, attract customers, build brand awareness, start forming relationships with not only your consumers but also future investors because during this new path of capital formation, you’re actually going to have the ability to continuously be converting your customers into investors. It’s a great way to test market the product.

Now, let’s say the widget that you invented … Let’s say you try this out with rewards-based crowdfunding and it’s a complete flop. Well, the good news is no one lost any money, and you have a chance to go back and perfect the product and try it all over again, no harm no foul. But let’s say it is successful. If it is successful and you want to move on, now you could kind of move on to a more formal round of crowd finance. Whether that’s through a 506(c), or whether that through a Title III Reg CF.

You could go sort of along the path, and as I said, continuously building your brand. Continuously building your customer base, and continue building your investor and shareholder base. Ultimately, let’s say you go through all this and then you’re ready to be public at some point. Well, no longer do you need a Goldman Sachs to take you public. At this point, you have an existing investor base to reach out to. You could really either make your direct public offering or utilize Reg A+ and go out to your customer base.

What I think is interesting is that it doesn’t just stop there because now let’s say your widget and your company becomes you know the next Apple. You still can go back … Let’s say when you want to launch a new product. Launching a new product, you don’t have to go your balance sheet or go out to the market and raise capital on an unproven product. You could go back to the beginning. Go back to the drawing board. Utilize rewards-based crowdfunding and test market the new product. I think ultimately if more businesses are bread and groomed and grow in this manner, the more efficient economies that we’re going to have.

So, finally just the last slide here, there are so many resources out there to help you. New companies are emerging every day to help emerging businesses successfully raise capital through the crowd. I’m always posting some helpful resources and new ones on my site. Feel free to visit daraalbright.com to read more. Feel free to also reach out any time to me through email or social media with any questions. I’m always happy to help, especially because you never know, one of you out there listening today could be building the next technology that will change the world. So feel free to reach out anytime and good luck.

Roger Royse:   

Thanks very much Dara. Always interesting, and you certainly have amassed a wealth of information on all the alternatives. Patrick Robinson, would you like to tell us a little bit about CircleUp and what you folks are doing in the market?

Patrick Robinson:

Yes, Thank you, Roger. Excited to follow up some of these tremendous presentations, which covered a lot of the crowdfunding industry. Excited to share a little bit about CircleUp, what we do, and our point of view on crowdfunding. I think as Dara’s slide just showed, there are so many different types of regulations and exemptions related to crowdfunding.

Sometimes it is confusing as an entrepreneur or a company to assess your options out there. So, CircleUp takes a somewhat unique approach where we view ourselves as a private online investment marketplace. We connect the consumer brand, consumer company looking for a private placement with our community of accredited investors.

I think what differentiates our approach a little bit from a lot of the newer regulations around Reg A or Title III is that much of our business is built upon the traditional 506(c) offering, which is a traditional Reg D exemption. So CircleUp, we are a registered broker-dealer, and we provide an alternative for companies and a compliment for companies to a traditional offline process for a private placement.

Some of the value we bring is leveraging an online marketplace model, and then a community-based model where we can aggregate a lot of demands from accredited investors to specific investment opportunities in privately held companies. Again, the key things there that we focus on are, for the most part, 506(c), Reg … I’m sorry, 506(b), Reg D offerings, and then doing a little bit of the 506(c) Reg offerings as well. Because of that, we are solely focused on attracting accredited investors to our marketplace.

We’ve been around for about four years. We started back in 2012 with this traditional marketplace model. Since then, we’ve grown slow and steady, so we’ve helped a little bit over 180 private companies raise a total of about $240 million. Similar to the dynamics that Adam discussed on RealCrowd, we tend to work with some more mature companies where our average fundraiser is a little bit over $1 million in equity. The average investment is a little bit over $100,000. Again, crowdfunding can mean a lot of different things across a company’s lifecycle, and where we focus on early-stage growth opportunities.

One unique thing about us, I think we’ve seen a lot of online platforms focus on specific industries to one, try to differentiate and also try to bring value to that specific vertical. For us, it’s attacking the consumer segment. We focus on consumer products goods. Anything that’s a physical product sold with the brand, and then also high growth retail and restaurant chains as well.

If we move on to the next slide, we can touch a little bit on you know why we think the consumer is such an interesting vertical and very interesting for this online private marketplace model. In our mind, the company size and stage really matter. Typically, a company is starting off; they could access donation-based crowdfunding platform like Kickstarter. They often leverage credit cards to get off the ground, and then their friends and family investors basically for that initial capital to come into the business to do initial production runs, get on the shelves of retailers, or set up online e-commerce.

But if we looked at consumer what we found was, there was a large gap between let’s say, a company just getting off the ground and where a lot of the institutional capital was focused. So, there’s a lot of later stages, growth equity fund and private equity funds focused on consumer product companies.. let’s say $15 million, $20 million and above. But there’s this really large untapped market of consumer businesses that are a half a million to $10 million or $15 million in revenue in the United States.

Very high growth but, when they approached the offline fundraising process, they found it very difficult. They would have to travel around the country to try to tap into consumer angel networks. A lot of early-stage investors are quite frankly focused on technology. So, a lot of our opinion is we wanted to unlock this vast asset class or these vast companies out there trying to search for capital to grow their business and introduce them to investors that make a lot of sense.

I also think the unique thing about consumer which we found very powerful given some of the recent regulatory changes, specifically around Title II. We’ve touched on this a little bit where a 506(c) offering allows a company to solicit, in layman’s terms, advertise that they are raising capital. In the consumer space, we’ve been excited about seeing companies leverage their early fan bases.

They’ve been able to reach out to their Facebook fans, their social media followers. Even their customer lists via email and kind of leverage their very core customers and gets them on as investors. That is a framework where some of the newer regulations have helped in this existing framework of a Reg D or a 506 offering, an online platform can help a company achieve their goals to fundraise by leveraging some of their existing fans.

I think we’ll also see this trend emerge throughout other categories as well, whether it’s technology or other consumer verticals. Also, the interest of institutional investors coming down to this asset class.

The last thing I wanted to touch on just as a final slide is, if you’re an entrepreneur, there are all these options. Quite honestly, the historical way of raising capital offline has been around for a while. There are alternatives out there, but if you looked around and you said, “Why should I use crowdfunding or an online investment marketplace? What are the benefits to me as an entrepreneur?”

The first thing we help entrepreneurs understand is, starting a process and leveraging an existing network of a community online really helps act as a forcing function. It eliminates a lot of the time you spend having those initial conversations where investors might just take a wait and see approach. So, kicking off a process with someone like us CircleUp, or another platform helps complement your existing investor community and network with another pre-built network of folks specifically invested in the offering that you have.

That helps create a little bit of a competitive dynamic. It also helps streamline the process where, I’m sure if an entrepreneur is out there that has gone through the funding process or the investment diligence process, so many entrepreneurs have … I’m sorry, so many of the investors have similar questions. So, kicking off a process, streamlining that, having all of your investors going through a process at the same time helps you eliminate the waste and help address some of those due diligence questions at the same time.

And then the two final things are, platforms like us CircleUp, RealCrowd in real estate, there’s a lot of domain expertise there. What we like to tell entrepreneurs is, the best companies out there fundraise maybe two to three, maximum five times in their lifetime, but these platforms are out there doing these deals every day. You can leverage a team with insights to help you set up your raise and help you as an entrepreneur put your best foot forward.

Then finally, leveraging software tools allows you to get more real-time information. You can have conversations with investors, leverage some of the tools and techniques that an online platform allows you to rather than just depending on the offline process.

That kind of wraps up my key benefits that we talk to entrepreneurs about. Again, we focus on consumer companies but, I think these benefits hold if you’re an entrepreneur in any vertical. That is from my side.

Roger Royse: 

Okay, thanks very much. There seems to be a lot of interest or questions about the Title III Crowdfunding. Just for our audience, this is the provision that allows private companies to raise sell up to $1 million of securities in 12 months to unaccredited investors subject to limitations. It’s relatively small amount, $2,000 or 5% of annual income or net worth. And we’ve gotten some new rules recently. Now, this is in effect. It’s active. These portals can operate.

But I wonder if some of our panelists can comment on whether this is workable or not because I know it’s been very controversial. As a lawyer I’ve been a little afraid of it just because of the expanded liability potential, but what does our panel think about this sort of crowdfunding? Is that something that you think we’re going to-

Gene Massey:

I can comment on that Roger. I don’t feel that it’s workable, and I have some people that share my opinion. First of all, you can only raise $1 million. You’re probably going to spend $50,000 to $75,000 to raise $1 million. You’re restricted in your advertising in that you can only have some very limited information that points you to a portal where you’re offering is displayed. You can’t go out and advertise in other places. You can only point people to that portal, and I feel that’s very restrictive. That’s my opinion on it and that it’s just not a great … It’s not a right way to raise money.

That said, it may be workable in some areas. For a beauty parlor, there are restaurants, it’s got a local clientele, and they’re going to raise a few hundred thousand dollars to build out a restaurant or to build a beauty parlor or something. For a little local business that has easy access to some user or community base where they can easily reach out to those people and collect money from people. That’s just my opinion. That’s what I have to say about it

Roger Royse:

Okay, thanks. And I was Gene Massey speaking. Thanks, Gene. Any of our other panelists have a view on this?

Dara Albright:

This is Dara. I tend to agree with Gene as well. I think that way that the bill was originally intended, to the way that it was passed, I think it just went through so many iterations and adaptions that I think it lost track of what the original intention was. I think what will be interesting to see is if McHenry’s Fix Crowdfunding Bill ultimately is signed into law because if it is, I think it significantly enhances, and it will enable much … I think it will enable a lot more companies to use it.

I think one of the biggest components of the HR 4855, which is the Fix Crowdfunding Bill, is that it allows funds and SPVs. SPVs is Special Purpose Vehicle. I think it’s a game changer because I think that it will help enhance diversification both from the issuer perspective as well as from an investment perspective. I think that that’s ultimately going to help. I think it’s going to enhance the whole process and I think it’s going to ultimately mitigate risk and allow more people to participate.

Roger Royse:  

Yeah. Dara that will be interesting to see how that bill comes out of Committee and how gets passed. Again, it also lessens the liability potential for people who participate in it like me, so we’re looking forward to that.

Another question here, we’ve seen so many different alternatives now under crowdfunding and crowd financing. One question we have is this from a company that has IP. They’re a little concerned about doing a Kickstarter sort of thing, and they don’t want to open up the kimono too much. They’re wondering, which one of these platforms would be best for them?

If they wanted to go out and raise money through a crowdfunding platform, would it be a 506(b), a 506(c) solicited? What would you advise somebody like that? They have IP. They don’t want people to know too much about their IP. They can’t go to a rewards-based. What would you recommend them?

Adam Hooper:

In the real estate world, we don’t deal too much with IP specifically, but there’s always a balance of trying to provide enough information that somebody’s going to get comfortable with the business model or the business plan or the underlying investment. But obviously, you need to guard your IP. There’s again, some certain mix they’re in that’s the right amount of information, but not enough that you could open yourselves up.

Most of the crowdfunding platforms out there, I don’t know if you would need to be disclosing deep, entrenched IP to potential investors. As long as you can communicate and tell the story of what it does, why it’s important, how they can believe in your ability to execute. The specific details of the IP that you’re trying to protect I don’t think needs to be fully on display.

In regards of what the right pass to do that is, whether it’s 506(b) or (c), Regulation CF or a Kickstarter campaign, it’s all going to be fairly similar in the story that you have to tell and the amount of information that you’re going to present. I don’t know that there’s too much of a distinction between which path you’re going to take to get to that capital because again, you have to tell a similar story regardless of which path you’re going down.

Patrick Robinson:

I can chime in. This is Pat from CircleUp as well. We do deal a lot with this, specifically in consumer-packaged goods. Something like a food company being very protective of their ingredient mix. I would just advise companies to think through, what is the ultimate audience here? In CircleUp’s point of view, we like to have the privacy and control of just having accredited investors and then additionally having software tools that allow the entrepreneur and company to decide exactly which investor can see what information in a diligence room. That’s something to keep in the back of your minds and evaluate for all of the platforms out there as an entrepreneur when you’re thinking about kicking off a fundraising process.

Roger Royse:

Okay, thanks very much. One question I’d like to throw out. I guess I’m the moderator so I get the last question but, I’ve had several clients now that are using crowdfunding strategically as a marketing tool. They feel like it gives them a really good bump to be able to go out into the market and say, “Look at this, we didn’t advertise or solicited offering and all of these investors are interested in our company. They want to invest in it.” Giving them an opportunity to show the value of the company and maybe even increase the valuation. Have you guys seen that? Is that a legitimate use of this platform or is that a benefit of it?

Dara Albright:

This is Dara. We’ve seen that in so many areas. I think that that is probably the biggest benefit of really utilizing crowd finance. You just even see it with a lot of companies that started off as rewards-based and then were able to then parlay that successful rewards-based campaign into venture financing. I think that not enough could be said for the brand building and marketing aspect and benefits of crowd finance

Roger Royse:

Any other comments from any of the panelists?

Adam Hooper:

Yeah, I think in the real estate space, the deal that showed on the slides, that was a hotel in San Francisco. Part of the push was for investors, and they have a perk set included with it. You get VIP access to the rooftop lounge; you get a discount on room rates. You get to go to an annual owner’s party at the hotel. And so yeah, to build in that marketing component where you’re building awareness for just the overall property, but you’re also building at the same time evangelist user base is something that is certainly another added layer to it.

And Pat, I’m not sure … Most of the companies that you’re working with, the consumer product companies, a lot of it is on that marketing front and again, telling the story and building that user base for these investors as well.

Patrick Robinson:

Yeah exactly, we’ve seen it be very important for brands to be able to tell their story again with the consumer angle. Interestingly enough, we’ve also seen big distributors reach out to us. Amazon reached out to us because we are in the CPG world and said, “Not only are you guys selecting interesting companies, but they have the funding to grow with us.”

So often, third-party resources out there look to these platforms and say, “These are fantastic companies but also have the financial backing that we can bet on this company, and they’re going to deliver.” I think this is a trend that’s not going away and you will see more and more partnerships or resources being attracted to the crowdfunding space.

Gene Massey:

Roger this is Gene. I’d love to just comment slightly on that. Especially the things that are fan-focused like the virtual reality, video games, and movies now where you have massive online communities. That cannot but help the marketing of whatever your device or IP is. For example, we have a model for selling a million shares in a movie. I know that some of the video games have massive interest from even not accredited investors in their Regulation A offerings and that cannot but help market I would think.

Roger Royse:

Yeah, you would think so, interesting. Okay, Well thanks very much panel. I want to thank you for being here. There are lots and lots of crowd financing panels and presentations, and they just seem to get better all the time as the area evolves, and the knowledge keeps moving along.

I’d like to remind our audience that this webinar has been recorded. You’ll be able to find all of the content including the materials on royseuniversity.com, the webinar section. It’ll also be available on our Royse Law YouTube site and available for download as a podcast in the iTunes store.

Our series is coming to an end next week, but we have a great program that we’re putting together starting late summer next fall. We’re going to cover things like to gig economy, disaster planning, lots of very relevant and new topics in technology and Law. With that, I want to thank our panelists again for being here. Thank you, attendees, for attending, and we are going to conclude the webinar.

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