What the ‘IPO lite’ SEC rule change means for life sciences startups, crowdfunding and venture capital
http://medcitynews.com/2015/03/ipo-lite-sec-rule-change-means-life-sciences-startups/
A new SEC rule change will allow startups to crowdfund for much, much larger sums of money. What does this mean for the life sciences industry? Consider this scenario:
You’re an early stage biotech, in an orphan field that has an active and passionate patient advocacy base. They aren’t wealthy, but they’re willing to invest. A handful of grants and a healthy angel round got you through preclinical trials – but now your capital needs are a touch more robust. You need $12 million to get you through Phase 2.
What do you do?
The standard route would be to hit up venture capital or a handful high net-worth individuals. But new SEC rules under the JOBS Act – dubbed “IPO Lite” and released March 25- now allow startups to get investment from these active, passionate, non-accredited investors.
“It’s a huge deal,” said Greg Simon, CEO of Poliwogg – a financial services firm that’s geared toward helping accredited investors and the public invest in healthcare startups. “Most health companies are going to be very excited about this, because it gives them far more leeway to raise the money they want to raise.”
Here’s why: The old SEC rules, under the JOBS Act, only allowed companies to raise up to $5 million via crowdfunding – which, let’s face it, isn’t enough to do much of anything in the health space. The new rule bumps that figure up to $50 million – which allows your average, retail investor participate in larger fundraises with more high profile companies.
There’s less of a reliance on venture capital, and we’ll likely see fewer life sciences companies headed to the pink sheets. Forbes put it succinctly: “…the control exerted by early-stage angels and venture capitalists, along with the structure of deals, could change significantly.”
What’s interesting with this rule is that it gives the general public access to a much more high-profile life sciences startup. The private biotech that has capital needs of $27 million is very different from the startup that needs $4 million. But it takes a lot of drops in the bucket to get to $27 million – let alone $4 million.
Plenty of life sciences startups have raised tidy sums on crowdfunding sites, but they have yet to reach the $5 million mark. The current record goes to Welsh startup Cell Therapy, which raised $1 million just recently on CrowdCube from nearly 300 investors.
It’s still a bit challenging to raise funds in the life sciences field, however, said Alexander Hoffman of Sanaria, a startup developing a malaria vaccine. It raised $45,000 on crowdfunding site IndieGogo, though it was gunning for $250,000.
“We got great feedback, and great support, but our crowdfunding effort took more time than we expected – and didn’t take off quite as we expected,” Hoffman said.
The problem, he explained, is with life sciences you have to sell an idea – it’s not about building a better mousetrap. There isn’t immediate gratification for the investor, in the form of a product they receive. This makes it a tougher sell, and more difficult to go viral, which is the mark of a successful crowdfunding campaign.
“The biggest thing,” Hoffman said, “is to try and build your campaign around something that’s tangible – not just an idea.”
But many of these life sciences startups, if we’re honest, amount to little more than ideas. There’s still a wicked high attrition rate, even among more mature startups. Venture capital is equipped to absorb this, but it’s a different thing entirely when Joe the Plumber invests $10,000 into a biotech whose cause he’s passionate about, and it goes bust.
And while we’re in the midst of this IPO boom, or bubble, we’re still not sure how long this sector will readily draw public capital. There have been a few dips in the biotech IPO market, however, thanks in large part to reticent general investors picking up on the volatility of life sciences performance. It’s safe to assume that such reticence will extend to the larger non-accredited pool that would participate in larger life sciences crowdfunding efforts enabled by the SEC.
It’s important to note – these are public offerings, not private offerings. By committing to one of these so-called “IPO lite” offerings, a startup is committing to going public within the next five years. But a lot can happen in five years, just as a lot can happen with $50 million. And there’s much less of a regulatory burden in this kind of an offering than an IPO. This could take some of the pressure off of startups, so they can focus more on innovating.