Equity crowdfunding…can they even DO that?!

Crowdfunding? JOBS Act? Are you confused with the new lingo buzzing about the startup and investor community? Let me try to explain. I am Sang Lee, the founder and CEO of Return on Change (RoC), a company that provides an online medium through which startup companies and entrepreneurs will be able to pool capital through crowdfunding. RoC connects innovative startups and investors who are looking to change tomorrow’s world today.

Here are three things you need to know before we continue:

• Crowdfunding is essentially collecting funds from a large group of people (also known as “the crowd”)
• The JOBS act permits the exchange of funds through crowdfunding for some form of economic return, i.e. equity in the startup.
• Return on Change and others like it will provide platforms to kick off your crowdfunding campaigns! Our motto is: “Startups. Crowdfunding. Simple.”

RoC would be fully launched right now…except….we have to consider the JOBS act and of course the good ole’ SEC. The good news is that the JOBS Act passed! The less exciting news is that everyone now has to wait for the conclusion of the SEC rule-making period to find out the exact details about what will and will not be permitted from a regulatory standpoint. From the date of the bills passing (4/2012), the SEC has a 270 day timeframe – that brings us to exactly December 31, 2012. Luckily, RoC anticipated this and we are eager to get more clarity and details around the following,as we know these will be key elements to the progression/development of crowdfunding as a viable and legitimate investing and capital-raising method.

RoC SEC wish list:

• Being able to provide certain pieces of advice to startups and investors
  • There are subtle differences between being an advisor and portal.  As a portal, we can provide invaluable tools and the platform for startups to raise much needed capital. However, we unfortunately can’t provide the type of customized financial advice for each startup without being an SEC-certified advisor.  What we can offer is general advice to help the companies listed on our site prepare them for the fundraising process.  Our hope is that the SEC will establish sufficient leeway for RoC to provide more valuable help to both startups and investors.

• Crowdfunding interaction with OTHER sources of Capital
  • RoC truly believes that crowdfunding can work seamlessly with traditional sources of funding (VCs and angels) and we are expecting some guidelines from the SEC as to how these funding sources can/will interact.
• Startup Reporting Requirements
  • RoC has prepped for some strict reporting requirements, especially because we believe it’s an integral step for both startups AND investors. As the SEC finalizes these details, RoC will have the tools in place to help startups with reporting. Like we say: Everyone’s Invested – including us!

As both a founding and board member of the National Crowdfunding Association (NLCFA.org), the RoC team and I are eager to see the rule-making period come to a close with favorable results.

Although we cannot actually start raising capital for startups and allowing investors to invest on the site, there is something we can do…GIVE AWAY MONEY!!

Return on Change is hosting their first contest for startups in RoC’s high impact categories: Clean Tech, Bio/Med Tech, Web Tech, Social Ventures. The first 50 startups completing registration will be eligible to win one of THREE $1000 Cash Prizes to aid in funding your business. In addition, the top 50 qualified startups chosen by Return on Change will receive free placement on the RoC platform, with no posting fees collected upon reaching their funding goal. While startups can win cash prizes, potential investors also have the opportunity to register on the RoC site for an exclusive invitation to connect with the winning startups and receive a sneak preview of the site before the official launch. The deadline for entering is approaching fast- June 30^th, 2012!

Entrepreneurs with great ideas need capital funding to jumpstart their businesses, and investors are looking to help fund the next big idea. Contact RoC@returnonchange.com or visit the RoC site: www.returnonchange.com

Here is link to the NYTimes article.

Its always amazing how people keep making the same mistakes. Those students of history remember the Wall Street abuses common before the creation of the SEC and the establishment of the ’33 and ’34 acts to both register securities and regulate the markets.

What we are regulating here is greed. and abuse. It hasn’t gone away and, as human nature, it never will.

Small registered securities can cost up to 17.5% of their proceeds in issuing costs. These costs are legal, accounting fees, printing fees and sales fees. And there is an after market.

I would review minority shareholder rights on a state by state basis. There is going to be a lot of litigation and a lot of failed deals. Some for business reasons, many for fraud or perceived fraud.

There will be a lot of lambs to the slaughter on this one. Then, they will either shut it down or increase regulation and oversite. Both are necessary otherwise you are letting the foxes into the chicken coops.

Raising money, something I have done successfully and not, is hard. Most people give up. I know I have.

Its a skill set which most of us don’t have.

What this law does is make it less expensive to offer securities to a larger pool of potential investors. The fact remains that those getting in early, should be subsequent rounds, will get terribly diluted.

On the other side it creates a standard set of deliverables which is good.

But the numbers dont make sense, up to 10% of your income, assuming earning of $100,000, this means you can invest, $10,000. So if you want to raise $1mm, you need 100 $100,000 earners to accomplish your raise. Will crowd sourcing work with these numbers? I dont know. More likely investors would like to spread their bets, so if the $100,000 income investor invests $1,000 in 10 deals now you are looking at 1,000 investors.

People invest because others invest, People this both know, have heard of and respect. Conventional friends and family rounds usually start with one investor who then gathers the others. They respect this individual and dont want him or her to be the only one to make money. Its fear and greed. That is their sole due diligence.

In the mid 1980′s I had just such an investor. He was one of the wealthiest men in NYC. He was a friend of a friend. He agreed to put up $100,000 and to get nine of his friends to do the same. Then he died before we could move the deal forward. Such is life, We all die.

Here is mashable link to crowdsourc financing goal accomplishment.

http://mashable.com/2010/06/21/crowdsource-funds-causes-startups/