Crowdfund Investing - Who, What, How & WhyZak Cassady-Dorion, Sherwood Neiss & Jason Best, Co-FoundersThe Startup Exemption
About us• Jason Best, Zak Cassady-Dorion & Sherwood Neiss – 3 entrepreneurs, all MBA’s, 2 Inc500 guys – Raised over $100M in traditional financing – Faced the funding void with the collapse of the markets – Coined the term ‘Crowdfund Investing (CFI)’ and brought the framework for equity-based Crowdfunding to Washington, DC in Jan, 2011
Group Exercise …• Social experiment. Here are the rules … – 6 questions – Listen and make a decision• Assume you are part the 54% of Americans that invest in the markets and you have a diversified portfolio to protect against loss• Assume you have $1,000 of completely disposable income handy. – Not your entire savings or investment. – Extra cash that you have sitting in your bank account.• How many of you would give me $1,000 if ...
How many of you would give me $1,000• I told I wanted to start a business that flavored medicines for children?• What if I passed a fraud check to prove to you I’m not some shyster?• What if I presented you with information about why – Kids don’t like liquid prescription medicines – My solution uses yummy flavors that overcome the bad taste without interfering with the medicine – How it will make money – Why I need $100k – What I will do with that $100k – The milestones I’ve set for that $100k and – That at this early stage I’m willing to part with 25% equity in my business in exchange for $100k?• What if I proved to you that in my last company I was a 3x Inc 500 Entrepreneur & Ernst & Young’s Entrepreneur of the Year?• What if I was your brother, cousin, best friend, or neighbor? You saw me develop this product, saw it work and know a chain pharmacy with 80 stores place a purchase order?• What if instead of the full $1,000 you decided to give $500, $250, $50?
Welcome to Crowdfund Investing• Where an Entrepreneur has to pitch to the crowd in an open setting – Who they are – What their idea is – How it will make money – What they are willing to give up in equity for that money• Where you, as an investor, can pick apart – The entrepreneur – The idea – The business model & – The investment opportunity• In an open dialog between you, the entrepreneur and all the other investors• Only if you are satisfied will you make a decision to invest• Only if an entrepreneur hits 100% of his funding target is any money exchanged
How Did we Get here?• Traditional Financing - Pre-2008 – Credit cards, HELOC, Private Money• Microfinance – Kiva for the developing world• Crowdfunding – Kickstarter for nonprofit projects in the US• Crowdfund Investing – The future of seed & growth capital
How Crowdfunding Currently Works Open area comment section. Where backers can ask Pledges Toward Goal questions. All or Nothing Financing Donation- Based Rewards Details about the Project. The more information thegreater the chances of funding
Why is Crowdfund Investing Illegal?• Security Laws of 1933 & 1934• Restricts who can invest in private companies – Must be accredited • $250k salary or $1M net worth• Prevents public solicitation – Internet is public domain• Shareholder cap at 500• Each State has a regulatory body with different rules What if we applied the principles of Crowdfunding to Seed financing? How could we make it work?
The Startup Exemption Regulatory Framework• Limit: $1,000,000, qualified small business• Investor Limit: $10,000 or 10% AGI• Standard Disclosures - From NASAA SCOR Form• Investor Education • Startups do fail • Only invest in people or businesses you know• Shareholder Cap: 500+ Investors (eliminate current cap)• State Authority: Preempt registration but not enforcement action• General solicitation: on SEC-registered websites• Notification: One-touch filing with SEC & State Regs.• Exempt: Regulated sites exempt from Broker/Dealer Registration• Not Allowed: Foreign issuers, Investment companies, Public companies
Where is the Investor Protection?• Entrepreneurs will have to disclose the same information that anyone raising money should (fraud check, name, contact information, description of business, etc)• Social media is based on many-to-many communication in real time. The free flow of information and opinions shape other people’s views• In Crowdfunding these thoughts will be cataloged and shared by would be investors• Unless an entrepreneur wins over the confidence of the crowd he won’t be funded• Where will Crowdfund Investing take place? – SEC Registered Web Platforms• What is the role of the Web platform? – Conduit for funding to take place – Background/fraud check – Social media integration/interaction – Centralized reporting to SEC of all CFI activity
1) Fraud Check• Your Name, Address, Social Security #, DOB2) Business Plan• Company Name• What problem does your product/service solve?• How does it make money?• How much money do you need?• How will you use the funds?• How far will those funds get you?• How much equity are you willing to give up for this capital?
This is what Social Media Gets you ... Questions from the Q:Hi Woodie -- I like your idea. Any data to back up your crowd theory that kids don’t like medicine? I know mine doesn’t but that doesn’t mean they all don’t. A:Hi Christina. Great question. There’s a really good study on pediatric compliance that was done by the American Answers from the Academy of Pediatrics in 2007. It showed that taste was entrepreneur the main factor why children don’t take their medicine. Here’s a link to the article: www.aap.com/pediatric_compliance. 93% Approve, 7% Disapprove The crowd responds and rates the answer My kids don’t like their medicines. I’ve got one that does and another that hates it As a pharma rep - i hear this all to often especially as it relates to augmentin.
Not Everyone Will Win the Confidence ofthe Crowd Funded 40% Not Funded 60%
Lean Start-up & Group Dynamics = All or Nothing Financing Funded ideas for Groups Lean Start-up Methodology
So, Where do we Stand? 2930 What webrought toWashington
Who is Against CFI & Why?1. SEC2. FINRA3. NASAAWhy Are they Opposed? Relevancy Validity Turf
What Needs to be Done? Register at www.LegalizeCrowdfunding.org
Important Facts• The degree of funding success will come down to transparency, communication, disclosure and connectivity• People will only back those ideas they think are worthy and with dollars they are willing to invest• $1 in .... 8 years later .... $36.40 out• Most importantly ...
Questions?• Feel free to reach out to us: – www.StartupExemption.com – www.LegalizeCrowdfunding.org• Contact – Sherwood Neiss, email@example.com – Jason Best, firstname.lastname@example.org – Zak Cassady-Dorion, Zak@startupexemption.com
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