When Title III of the JOBS Act went live in May of 2016, the main objective was to make it easier for entrepreneurs to access capital and for all sizes of investors to access opportunities. The presumption was that start-ups and early-stage growth companies raising their earliest rounds could reach to the crowd. The crowd — predominantly unaccredited investors — could get in on the real action, investing capital in the kinds of companies previously accessible only by professionals and sophisticated investors.
Sophisticated angel investors typically tune out when they hear the words “crowd funding.” Little do they know that Reg. CF could be a blessing for them.
The Trouble with Angels
Angels are typically in it for the long haul. Some that I’ve interviewed lament that they’ve invested all their money, save for reserves to fund further needs of their existing companies, and they haven’t had any exits yet. Angels are known to get involved earlier in a company’s life-cycle than professional venture investors do. They’re considered more risk-tolerant and patient with regard to realizing a return on investment, driven as much by desire to help promising entrepreneurs as they are by a profit motive. Contrast them to VCs, known to be rather demanding and at times impatient when it comes to timing of their exits, and it becomes obvious why the former are considered “angelic” in the first place.
Given that they might write checks of $25,000 to $200,000, a lack of liquidity could sideline an angel indefinitely, until he or she can generate additional investable assets to get back in the game. It must be frustrating for a willing investor to see innovative young companies and not be able to get involved with them. When it comes to providing fuel for startups, that’s unfortunate all around.
Diversification and Liquidity
A number of Reg. CF’s features can change the game for angels. Consider minimum investment amounts and liquidity, for starters. With Reg. CF deals advertising minimum investments as low as $100, angels can have significant impact in boosting a startup without doing all the heavy lifting. Involvement of a few sophisticated investors could conceivably be sufficient to get the ball rolling, attracting other investors and propelling the company to its lofty investment goals. Thousands of small investors across the country or the world could account for the balance of the targeted capital raise. Angels can still wield influence and guide the company. With investment amounts smaller than their typical check, they can reach more companies and likely do more good than they could with a concentrated portfolio. Greater diversification in his or her portfolio will likely increase the angel’s expected rate of return, as well.
Increased liquidity would likely appeal to angels who are often resigned to waiting 5–10 years or more for a liquidity event. Reg. CF allows for a public secondary market for the securities or debt instruments, subject to a 12-month holding period, at most. (The holding period can be waived for a number of reasons, including selling to another accredited investor.)¹ Investors can theoretically realize gains or losses much more quickly in a liquid secondary market. And the more investors that participate, the more vibrant the secondary market can be.
If that isn’t enough, consider ease of transacting, lack of hefty deal-related fees, and the security of SEC involvement as additional benefits of Title III Regulation Crowd Funding deals. Sometimes known as Online Public Offerings, or “OPOs”, the transactions must be done online through an SEC-registered broker-dealer or funding portal.² (A list of funding portals registered with FINRA to act as crowdfunding intermediaries can be found here and a list of FINRA-registered broker-dealer firms is here.¹) Because the SEC wanted to weed out potential for fraud and bad actors, issuers must file a detailed Form C with the SEC (fully available to the public). There are also requirements for reviewed or audited financial statements, depending on deal size. Investments can be made quickly and easily on the platform without the complications of separate term sheets or attorney involvement on the part of each investor, and the platform can keep track of the cap table, lessening the administrative chores that are typical in making such investments.
Leveraging the Crowd
“Title III was intended to help small and startup businesses conduct low-dollar capital raises on the Internet. It can be thought of as an Internet-based method of raising seed financing from a broad, mostly retail investor base.” (Ivanov and Knyazeva.)³ Mostly retail. If angel investors can have all these benefits of retail investing while simultaneously adding portfolio diversification and liquidity and keep doing the kind of investing they love, what would be so wrong about that?
Learn more about Title III Regulation Crowdfunding:
From the SEC:
From @Howard Marks, CEO of StartEngine, a leading platform for Reg. CF crowd funding deals:
¹ U.S. Securities and Exchange Commission, Updated Investor Bulletin: Crowdfunding for Investors, May 10, 2017.
² U.S. Securities and Exchange Commission, Regulation Crowdfunding, https://www.sec.gov/smallbusiness/exemptofferings/regcrowdfunding.
³ Ivanov, Vladimir and Knyazeva, Anzhela, U.S. Securities-based Crowdfunding under Title III of the JOBS Act, February 28, 2017.
⁴ Marks, Howard, Why Entrepreneurs Will Turn to the Crowd for Funding, Medium, October 11, 2018.
⁵ Marks, Howard, The IPO is Dead. Long Live the OPO, StartEngine blog, September 6, 2016