Raising capital and investing practices needed an overhaul. Capital formation as a whole was due for not only a review but a fundamental change in the way we do business. There are two sides to this tale but both investors and entrepreneurs have come together to create a groundswell which can no longer be ignored.
In the past 18 months we have had some really great conversations with early stage founders, Pre-IPO companies, first time investors and the odd investing professional. None of our conversations went on without mentioning 3 letters which have dominated the capital formation narrative: I. C. O.
There is always some blurred dialogue between “Crypto Currency” and an “Initial Coin Offering” (ICO) launched by a new business. The conversations we engaged in were not about a digital currency looking to be the universal payment mechanism in borderless commerce. When ICO’s were brought up in our conversations with investors and entrepreneurs they were in the context of raising money as a new business or accessing these investments as an investor.
We witnessed millions of capital commitments flow into new ideas and disruptive startups. We saw thousands of investors rush to create digital wallets and invest with blind optimism (ok, maybe a little more greed than optimism). Now, we’re seeing the fall out of fast and unregulated investments.
Looking beyond the noise and the hype, here’s what we heard:
Who and How we invest is about to dramatically change forever. Investing shouldn’t be limited to the wealthy elite, it is no longer an old boys club. Gone are the days where investing opportunities were only presented to those willing to write five figure checks. Investors want direct access to investment opportunities without interference. They want to know that the money they invest is sent directly to the company and reflected on that company’s books. There is no desire to have to open an account, deal with administrators and succumb to service fees.
Access to capital shouldn’t be a series of flights, pitches, pivots and rejections. Raising money as a startup or emerging growth company no longer means VC’s taking half of your company and your lunch money!
The change movement is infectious and evolving at breakneck speeds. As a result, regulators are now forced to move quickly to try and keep up.
Contrary to what you may have heard or read there is still no ICO Framework approved by the SEC or FINRA. No compliance playbook written to launch an offering or a pathway to clearly and compliantly invest.
Some have claimed that an ICO using the Reg D-506(c) exemption, because of its general solicitation permissibility, could be an option. However, those offerings are only limited to accredited investors which defeats the spirit of inclusion the ICO embodies. Companies using this exemption are also required to make reasonable efforts to verify an investors accredited status. This could be a challenge if the purchaser of record is a digital wallet. It should also be noted that securities sold in this fashion are restricted – by law, you won’t be seeing them on an exchange any time soon.
Reg A+, a staple in the crowdfunding industry, could be a fit.
This raise exemption allows for accredited and non-accredited investors to participate in early stage financing. The company looking to raise funds is allowed to market the offering following the general solicitation guidelines. A business can raise up to fifty million ($50M) in a 12month period. Moreover, once the round is closed, the securities are freely tradable.
Sounds like a start…
Sadly, there’s a group who got steamrolled in the ICO hype…the crowdfunding issuers.
Interesting and transformative companies who met the regulatory requirements and wanted to give all investors a chance at an early entry. Companies who had registered subscription agreements clearly itemizing equity rights. Businesses ready to meet reporting and disclosure requirements – those doing things right.
Wouldn’t it be ironic if in the end, the only thing to save the ICO is the crowdfunding industry it almost killed?
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