Perspective on equity crowdfunding from the founders of BolstrBy http://profile.typepad.com/6p0167689bed4d970b // August 3, 2012 in Crowdfunding, JOBS Act, Reg D
Note from Bill: the following is a guest post by Charlie Tribbett and Larry Baker. I am not affiliated with their crowdfunding platform, nor do I have any experience using it. (In fact, I could count the number of Rule 504 offerings I've worked on with one hand.) Two reasons made me want to run this post: (a) Charlie and Larry present their case well; and (b) theirs is another example, like Jenny Kassen's (which we've talked about on the blog earlier this week), of innovators using pre-JOBS Act structures to realize a kind of "equity crowdfunding."
On the heels of the JOBs Act, which may be deemed as one of the most revolutionary changes to financial regulation in our history, entrepreneurs raced to develop new platforms to capitalize on the rule change. Crowdfunding quickly became the buzz with a multitude of new platforms popping up. This created a confusing conglomerate of vastly different models all claiming to be the market leader. In this guest post we attempt to decipher through the noise, and shed some light on this burgeoning sector.
Let’s start by introducing ourselves. We are the founders of Bolstr, the first crowdfunding platform focused exclusively on the small business demographic, and the only investment-based platform that is in operation today (Pre-JOBS Act). We set out on this mission over a year ago, prior to any talks of crowdfunding legislation. We never thought that the Securities Act of 1933 (amended) would be repealed in our lifetime, so we set out to ascertain a solution that would work within the confines of the current regulatory system. This was a daunting task to say the least (See Paul Graham’s post on “Schlep Blindness”), but one that we whole heartedly believe is critical to our society, and economy.
We believe that small businesses deserve access to capital for operations and growth. We also believe that local individuals investing in local small businesses will help create local jobs, wealth, and economic progress. Community investment not only gives a small business access to capital, but it also creates an army of local supporters financially motivated to spread the word and promote the business throughout the community. This is our vision.
When we tell this story the first response we get is “but only accredited investors (those who are millionaires) are allowed to invest right?”… Or, “so these aren’t actual investments, they’re donations right?” The answer to both of these questions is, no. On Bolstr any individual is able to make an investment in a local small business in their community regardless of their personal wealth. They also have the opportunity to share in the financial upside of that business through a custom investment structure called a revenue share.
After extensive research into the current securities laws we found a way to make this mission a reality. Here is an overview of how:
- Bolstr leverages Regulation D, Rule 504 to enable small businesses to raise up to $1,000,000/yr from individuals in their community including those who are unaccredited
- Bolstr’s proprietary compliance engine helps small businesses easily construct a fundraising campaign – it takes into account a multitude of variables to ensure each business complies with the complicated state-by-state blue sky regulatory laws
- Each campaign on Bolstr is private and secure, allowing businesses to source capital from individuals around them (i.e. those that they have pre-existing relationships with)
We’ve been following this industry closely for several years and have watched the evolution first-hand. The market today has a plethora of platforms with remarkably different models all using the term “crowdfunding”. We classify them into three groups: donations, investments, and new entrants looking to capitalize on the JOBS Act.
Platforms like Kickstarter, Indiegogo, Rockethub, and Fundly have been operating successful donation based models for years. There is a misconception that these platforms are donation based purely because it is illegal for them to facilitate the general solicitation of investments today. The fact is that many donation-based platforms may not stray away from their core even when the JOBs Act is effective. In fact, Kickstarter has already stated that they are not interested in the JOBs Act model. The donation model has proven successful, and it will likely continue to be a dynamic way to fund interesting projects or to pre-sell new products for some time.
Bolstr represents the first breed of investment based crowdfunding platforms for small businesses. We do not allow startups, and are the only platform successfully operating pre-JOBs Act with both unaccredited and accredited investors participating. In December 2010 Profounder launched a somewhat similar model to Bolstr focusing on a broader criterion of businesses including start-ups. Unfortunately, Profounder was deemed to be operating without a broker dealer license, and was ordered to desist and refrain from operation in August 2011. In his WSJ article "Crowd-Funding Brings Unease" Angus Loten does an exellent job outlining this chain of events.
Aside from Bolstr the vast majority of investment based platforms today have registered as a broker-dealer. To name a couple, MicroVentures and CircleUp are in this group. Although these platforms often use the term “crowdfunding” they are far from it, since they are limited to only “Accredited Investors” (Roughly 2% of the U.S. population). They are also restricted to facilitating larger offerings for mature companies, as opposed to main street small businesses, because of the cost associated with broker dealer compliance.
This is where it starts to get fuzzy; almost all of the platforms that emerged over the last 9 months have been fall-out from the JOBs Act. This group continues to wait in limbo for the specific rules to be written that will govern how they are able to operate. As a result, many have not facilitated a single transaction, have not outlined a clear market focus, and in some cases have not completed building their platform. It will be interesting to see how these platforms evolve as clarity around the JOBS Act surfaces.
At Bolstr we can proudly say that we are the only investment based crowdfunding platform in operation today, due to the fact that we allow both unaccredited and accredited investors to participate in an offering. We are also not restricted by the size of the offering that can take place on our platform, and have a specific focus on main street small businesses.
Hopefully this blog has helped to filter through some of the noise in the crowdfunding space. For the time being it is inevitable that the landscape will continue to be blurred as new entrants look to capitalize on the rule change. Over time we expect the market to become more segmented and specialized, as clear winners in their respective areas become evident. For the time being all we can do is enjoy the ride and watch the market evolve. We have our views on the various models and market segments that will succeed, but that is a post for another time.
Charlie Tribbett & Larry Baker are the founders of Bolstr. For more information about them visit www.bolstr.com, or check them out at FinovateFall 2012: The Biggest Innovations in FinTech! on September 12 & 13th.
Photo: Wickham square congestion, Robert Soar / Flickr.