Signing of the JOBS Act (April, 2012) signaled a new era for the “democratization” of capital providing Accredited and Non-Accredited (pending final regulations/approval from SEC and FINRA) investors unprecedented access to private companies/start-ups through Crowdfunding – a method of raising capital in small amounts from a large group of people using the Internet and social media.
Crowd Finance Portals inspired by the JOBS Act, including HealthiosXchange – “Healthcare’s Investment Marketplace,” and FundersClub’s “Managed Venture Funds” (technology sector focus), were subsequently launched to meet investor demand for early-stage investments (invest in the next “Google”) while meeting the need for diversification across a number of start-ups via low investment thresholds (as low as a $2,500 per investor per company).
In a Q&A session with a major pharmaceutical publisher, Scott Jordan answered questions about the prospects for crowdfunding in the life sciences industry.
Why does Crowdfunding work? How does Crowdfunding work in niche markets?
Crowdfunding works by democratizing the flow of capital to promising start-ups. When the JOBS Act receives FINRA/SEC approval, non-Accredited investors will have the opportunity to invest in private companies leveraging Crowdfunding technologies to diversify holdings across multiple early-stage companies. Advancements in Crowdfunding technologies (i.e., eDocuments/Payments, online due diligence and financial reporting) will assist early-stage companies raise capital from Non/Accredited investors more efficiently than current strategies which are largely opportunistic at best. Promising Crowdfunding platforms such as FundersClub and HealthiosXchange are utilizing these Crowdfunding technologies to attract investors interested in funding early-stage privately owned companies but currently dissuaded by existing Angel Group models requiring cumbersome time commitments (meetings), obligations to pay annual dues, and high investment threshold minimums (inability to diversify within a risky asset class).
Niche Crowd Finance platform such as CircleUp (focused in the consumer goods industry) and HealthiosXchange (healthcare sector) are ideally positioned to capitalize upon their domain expertise (both companies originate deals and have institutional pedigrees) and “Rolodex’s” of industry “Ecosystem” members (Large Pharma/Biotech, Venture Capital) to successfully Crowdfund Accredited and Non-Accredited investor capital. As evidenced by the recent collaboration of CircleUp with Procter & Gamble, Fortune 100 companies are seeking to partner with Crowd Finance platforms that can identify promising companies attracting capital.
What is the legal status of Crowdfunding?
Raising capital from Accredited investors has been legal and vibrant for many years in the United States under existing Reg D/Rule 506 exemptions. In 2011, companies raised over $905 billion through Reg D offerings. Even though a majority of this capital was raised in “yield” and “asset-backed” securities including oil and gas and private non-traded REIT’s, it still illustrates the power of this financing vehicle.
HealthiosXchange, launched by a leading healthcare investment bank, Healthios, is leveraging the Reg D exemption to launch the company’s Ex.PR.E.S.S. securities platform designed to raise follow-on capital (“Side Cars”) for Angel and Venture Capital-backed companies with strategic validation (partnership with large pharma/biotech), and near term exit potentials (12-24 months). Improving the risk/return profile for retail investors via platforms like Ex.PR.E.S.S. are critical given private companies in the life sciences sector do not yield (interest) or have short investment horizons most favored by this investor class.
The JOBS Act will enable Crowdfunding from Non-Accredited investors (Title III of JOBS Act). The SEC/FINRA have set preliminary investment thresholds per investor per year subject to change, based on the investor’s net worth and annual income. These governing bodies have been slow to implement this JOBS Act language given sensitivities surrounding the potential for fraud. Title III of the JOBS Act is forecasted to be signed by the end of 2013/early 2014.
Title II (Reg D) and Title IV (Reg A+) of the JOBS Act seem to be gaining more support/traction with regulators given these regulations focus on Accredited Investors. Title II contains provisions for General Solicitation of securities (no pre-existing relationships required) and increases the shareholder cap from 500 to 2,000 investors before a company would be required to “go public,” both integral to the proliferation of Crowdfunding Accredited capital under Reg D. Title IV expands the capital ceiling for Reg A offerings from $5 to $50MM.
Is there a risk only the more sexy diseases will get funded?
Yes, that is a concern but is consistent with the democratization of capital meaning capital flows will be based upon supply/demand. However, given Crowdfunding capital is sourced from various donors/entrepreneurs with myriad goals and aspirations, Crowdfunding capital should flow into a large number of disease states. Investors are projected to invest in sectors of healthcare with lower capital requirements/regulatory risks (i.e. Healthcare information Technology) and sectors generating EBITDA (i.e., Healthcare Services).
Scott answers additional questions in a complimentary 5-page handout, The “Democratization” of Capital Q&A:
- What is the difference between equity Crowdfunding and non-equity Crowdfunding?
- What’s the future of Crowdfunding? Is it just a fad?
- What’s the current environment for funding for biotech/life sciences companies?
- How important is this early stage funding for companies?
- Is Crowdfunding a feasible alternative to other types of funding streams for life sciences and biotech?
- What can Crowdfunding offer that donating to research charities can’t?
- The product pipeline is dwindling at many pharma/biotech companies. Is Crowdfunding a solution to plugging the “innovation gap?”
- What happens later on when the company needs additional financing?