Title III crowdfunding is officially becoming the other variant of investment crowdfunding along with Title II and Title IV (Reg A+) already this May. Even though this will create a more vibrant capital ladder for companies seeking to raise capital using the internet, within the industry the views vary. By some Title III is viewed as critically flawed while others believe it will emerge slowly as participants adapt and find ways to accommodate the most challenging aspects of the exemption. According to recent information provided to Crowdfund Insider, approximately 30 platforms have applied to the SEC to operate as a funding portal. Of these platforms, less than two dozen have completed the filing with FINRA. None of them were deemed complete and remain in process. Interestingly, some of the more “visible” platforms have not (yet) submitted applications.
But let’s leave this stuff for lawyers and policy makers and take a look at something that most of these platforms focus on – equity crowdfunding implementation. Among all of the issues being discussed, there are some things that both novel investors and businesses raising money should think through.
Investors – how do you feel about the valuation process? For sure, some of you have been waiting for this investment opportunity and know all about the process: the most common approach is to look at market comparables. You probably know that common market multiples include: enterprise value to sales (EV/S), enterprise multiple, price to earnings (P/E), price to book (P/B) and price to free cash flow (P/FCF). And you definitely know that to check how a business compares to rivals and to look at market transactions where similar firms, or at least similar divisions, have been bought out or acquired by private equity firms or other classes of large, deep-pocketed investors. But how much will you actually win at the exit with the dollar amount that you put into the company? And when and how many companies will actually have an exit?
Entrepreneurs – how do you feel about having 200-300 non-accredited investors on your cap table owning less than 1% of the company? Raising money through crowdfunding seems simple, some of you might have done it through reward-based crowdfunding so you know that it is a lot of effort but it works. But how will equity crowdfunding affect your future fundraising strategy, taking into account that institutional investors won’t know how to deal with it. Should they buy those shares out on top of buying initial shares? Should they have a special class of stock what might lead to a complicated cap table structure?
Asking these questions is not trying to stop you from using this amazing opportunity – but to do it wisely. Crowdfunding is one of the great things the Fintech revolution has created – and now it is up to us to create structures that would be beneficial. At StartWise, we are working on security that is technically a loan – as a result, there is no complicated cap table and investors see the returns regardless of the exit strategy. This funding option fits every type of business and makes investing easy for investors. We come from a simple perspective – that everyone should be able to invest and get funded. And crowdfunding is a great way for the market to have a voice, so we’ve been rethinking investment ever since. Investing into companies sounds like a complicated process – we are working hard to make it easy for everyone.