CFWS Interview Highlights 2
Here are some highlights from more of our interviews from CrowdfundingWorldSummit.
David Weild: Insights from the Father of the Jobs Act
- Serious discussion began in 2008 that grew into what is now the Jobs Act.
- The number of IPOs has decreased significantly since the 90s and was a problem that needed to be fixed for economical development.
- The Jobs Act was meant to rebuild the IPO industry and provide funding for innovative startups.
- A new Jobs Act underway to accommodate the lack of incentives for aftermarket trading.
In the 1990s, more than 50% of IPOs were small businesses, and after new regulations were put in place to help protect investors that unintentionally removed all incentives for initial funding and support. Thus small business IPOS decreased substantially. In order to sustain a healthy economy, there must be a healthy stock market, which is fueled by a large number of startups. When startups don’t have the chance to get returns (no initial funding) the investors don’t have ongoing funds to invest anew.
The recent jobs act is intended to help fuel small business IPOs and promote the US economy through startups and innovative investments. This process, while just passed in September of 2013, began in 2008 as a small initiative that grew with support. After being brought to the House of Representatives, it was compiled into the six individual bills that now comprise the Jobs Act. It was a bipartisan initiative, backed by the White House, and then quickly passed by the Senate.
While the new Jobs Act is set to get our economy back on track, there are some crucial elements missing. For example, a new division is needed to support a small IPO system, focused solely on stocks, investors, issuers and intermediaries in aftermarket trading incentives. Aftermarket trading incentives allows companies to understand their exit strategies and ability for reinvestment as preset by a liquidation strategy for their investments.
The Jobs Act will continue to develop as new frontiers are explored and opportunities discovered.
Devin Thorpe: Crowd Funding Social Entrepreneurship
- Crowd funding is necessary for fueling early stage companies and overall economic recovery.
- Pretailing is when people purchase a product or idea before it is produced (such as through Kickstarter).
- Crowd funding creates proof of concept and lessens the risk for investors, thus increasing the potential for creativity within the marketplace.
- Crowd funding is only just beginning and there is still plenty of time to get involved.
Crowd funding is the most important thing to happen to social entrepreneurship because people love to support social entrepreneurs.” With current platforms like Kickstarter, people can invest in products they’re interested in and see them through to fruition. As crowd funding expands with the recent Job Act, more people can get involved in their community’s growth and help fuel innovative entrepreneurs.
Crowd funding is unique as it creates a relationship with immediate, possibly unaccredited investors, through pretailing and presales. By finding people willing to invest, whether friends of family or interested anonymous parties, proof of concept can be created. Proof of concept allows for further funding from large, accredited investors outside of the Kickstarter realm, which will be pivotal when equity based crowd funding becomes possible nationwide. By showing that people are already interested and invested in a project, especially community members or patrons, investors see less risk in investing. This funding method allows for more creativity in the market as ideas can gain traction from the beginning, turning to large-scale investors once they’ve gained local investors and proof of concept.
Crowd funding, though socially a longstanding custom, is only just becoming legalized and mandated. Though the process may appear slow in its first few years, crowd funding is expected to expand the market exponentially which should encourage new investors to get involved. Local money invested in local companies has the potential to be very powerful, especially when taken into a national, and international realm.
Humphrey Polanen: Investing as a Collective Whole – The Potential of Crowd Funding
- Crowd funding allows more accredited investors to become involved in startups that they’re passionate about.
- Leverage is gained through strength in numbers and finances.
- Platforms can help facilitate complex investment strategies and from successful relationships between startups and investors.
- An Investment Consolidation Representative may be created to facilitate investments of multiple parties as a single legal entity.
With the new crowd funding laws, the potential for investments of smaller values from interested parties increases exponentially. However, startups are often not prepared to deal with hundreds of shareholders. While platforms and mentoring entities can help a startup navigate through this process, there is another potential solution that could radically change the investment realm.
Currently there is discussion regarding the potential of a single investment professional representing a collection of accredited investors as a single legal entity. Such an arrangement could benefit investors and issuers alike. For the issuer, there are fewer phone calls to receive and shareholders to follow up with. For the investor, more investors, investing smaller amounts apiece versus their fellow buyers, can collectively pursue more competitive IPOs as their investment is greater as a summed whole than as individual parts. In addition, shareholders, who may not be overly experienced, are able to work through a single investment professional that represents their interests and follows up with them on the business’s progress. Shareholders are more competitive and powerful as a sum rather than an individual and businesses are able to accommodate many investors through a single transaction.
While this is still only a hypothetical possibility, it speaks towards the future of crowd funding and the investment opportunities of local communities. Investors are able to see return on their investment by working as a team rather than individuals and investments typically championed by larger institutions can be fulfilled by a collection of smaller passionate investors.
John Perkins: Investing Funds to Invest in Returns
- In Direct Public Offerings, money raised in a 506 plan can help pay for costs, staff and registration.
- If you reach the minimum escrow amount, begin using funds to fuel future growth.
- Crowd funding can provide companies with the opportunity to use initial funds to invest in their education and counsel as well as products.
- The goal is to invest in the company so that investors get returns.
One of the largest downfalls of startups is a lack of expertise. Expertise often comes with key investors who are passionate about a project, such as local communities or experts in the field. Expertise can also come through a group of advisors, legal and business, and registration processes. The 506 plan and Crowd funding allow for startups to take advantage of these assets while moving a business forward.
In a direct public offering, as described by John Perkins, the 506 helps to pay for upfront costs for beginning a business such as carrying costs for staff, registration fees, licensing fees etc. It can take years to achieve the funding goals of the company for full fruition, however once a company reaches the minimum requirement for an escrow account, funds may be used to increase future escrow growth.
In crowd funding a similar concept is used. Through crowd funding sites like Kickstarter, reward-based crowd funding is already seeing the benefits of user-funded projects. These startups need to produce products while still learning and providing for both themselves and investors. Through crowd funding, proof of concept can be achieved, thus providing a means for further education and development as well as creating a legitimized proposal for a large investor.
Both of these methods allow for startups to begin utilizing raised funds to not only produce products, but to produce educated, legitimate companies that have the potential to reward investors for years to come.
Joseph Bariszoni: Platforms Leading Startups Towards Success
- CommunityLeader is a crowd funding platform to help connect resources and assets within a community
- Currently, minority business owners, though a large portion of startup owners, have little access to capital.
- CommunityLeader is an “investor initiative to connect investors with projects that meet their interests and qualifications”
- Platforms can help guide startups and entrepreneurs through crowd funding throughout their business’ lifetime.
With the growth of crowd funding and investments varying from regional to international levels, investment platforms have developed to better connect issuers with their optimal investor. CommunityLeader, founded by Joseph Bariszoni, is a platform intended to stimulate communities through strategic investments and educated issuers. To do this, CommunityLeader helps connect investors to projects that meet their interests and qualifications while taking the entrepreneur through a series of preliminary steps to further their education and understanding of the investment process.
Given that CommunityLeader is online, the additional education program is pivotal in the relationship between investor and issuer. The platform creates a full system integrated solution for bringing businesses and investors online, matching them, and ongoing settlement, fulfillment, and support of investors over the lifetime of the investment. Having a predetermined education process for issuers makes investors more comfortable with the risk of a startup investment. Also, this process ensures the welfare of both investor and issuer, as the new Jobs Act has expanded the forum of investors to include non-accredited participants. Platforms are accommodating these changes through new regulations and policies.
The overall goal of platforms like CommunityLeader is to provide a support and education network for startups throughout their lifetime. Many people think that with crowd funding, once the initial goal is reached the hard part is done. This is not true as it is only with funding that a company can begin its production and expansion, and that the investor begins to hopefully see a return on investment.
Landon Ray: Entreport and the Potential of Management Tools
- Entreport’s tools make client communication and advertisements more efficient
- Through automated processes, enabled by a single hub of all client information, entrepreneurs can appeal to relevant investors and follow their interest in one place.
- Time Block and Drivers Ed help make train employees in the entrepreneurial mindset, increasing yields and interest in the office.
- When employees feel empowered and passionate about what they’re doing, yields and opportunities increase for employee and company alike.
Entreport is an online marketing system for businesses that applies innovative ideas to both client and employee interactions. This could be key for entrepreneurs and startups.
Contact Management and Rules are two of the primary online marketing tools used by Entreport. These tools allow for all contact data to be housed and linked in one location so that interactions are instantaneous and preprogrammed for the best client relationship. Rules allow for the client relationship to become more face-to-face with each interaction programmed by their individual interests, needs and responses.
Management tools such as Time Block and Driver’s Ed encourage employees to make the most of their time at work. Time Block allows employees to focus on projects they’re passionate about for a set time every day, even if these interests fall outside of their typical “business maintenance” tasks. This give employees an incentive to finish their “business maintenance” work so they are able to take advantage of their time block, creating higher yields of work overall. Driver’s Ed is a program meant to encourage employees to understand how to work efficiently and passionately while encouraging entrepreneurial skill sets. This allows employees to feel empowered in what they do and to understand how to view and make use of new opportunities that arise during their business maintenance and time block hours.
Online marketing tools and in-house management programs allow entrepreneurs and startup businesses to thrive in an efficient, innovative environment that is every evolving with new opportunities.
Marlon Paz: The Difference Between 506C and 506B
- There are two ways to raise capital in a public market: registration with the FCC and exemptions.
- 506C is a recent expansion of the original 506(B) created in the Jobs Act.
- Rule 506B allows for 35 non-accredited investors and an unlimited number of accredited investors but prohibits general solicitation.
- Rule 506 C allows for general solicitation but prohibits non-accredited investors.
There are only two ways to raise capital in a public market: register with the FCC or have an exemption. Registering with the FCC requires an incredible investment of time and energy for someone trying to start a business. That is where the 506 comes into play as a key exemption for startups.
Prior to the Jobs Act, the 506 exemption allowed for 35 non-accredited investors and an unlimited number of accredited investors as long with the parameter that public solicitation was prohibited. These investors had to be found through pre-existing relationships. This option is now referred to as 506B and with 506C, the Jobs Act has created a new exemption alternative for entrepreneurs.
While the 506B allowed for entrepreneurs to draw from friends, family, and accredited investors alike, the prohibition of general solicitation deprived entrepreneurs of outside investors who may be interested in their business. The 506C works to accommodate the need to reach individuals who an entrepreneur may not have a preexisting relationship, with the stipulation that all investors must be accredited if general solicitation is used. Entrepreneurs are thus able to draw from a larger pool of investors, but all of their investors must be accredited. Accreditation is determined by income and sustained wealth, eliminating some potential non-accredited investors from the pool.
Both the 506B and 506C are in effect and provide entrepreneurs with two options to fund their startup companies without having to become registered with the FCC.