Interested in angel investing but don't want to burn a pile of cash in "investor education"? We don't think you should, either. That's why we've lowered our minimum investment threshold from $1,000 to $100. We strongly believe in diversification and want to make it as easy as possible for you to get your feet wet with online investing.
Sadly you still need to be an accredited investor to invest, but good news is around the corner. The SEC has released a set of proposed rules for unaccredited crowdinvesting (read our writeup here) and we expect the gates to open mid-2014.
(Join the discussion on Hacker News)
Today, the JOBS Act has been partly enacted - the ban on general solicitation has fallen! For the first time in 80 years, it's legal for startups to talk about their fundraising publicly. The world just changed.
To celebrate, we are featuring great 25 startups from Y Combinator, Techstars, and MIT. You can pick your own winners, and invest as little as $1000 in them... or invest $5000 in a fund with all 25. We're excited to be able to show an "invest" button publicly! Can you imagine trying to build Kickstarter without the buy button? That's the challenge we've faced until now.
Complying with securities regulations is complex and expensive... but we've spent a lot of time reducing costs. So, we've decided to pass on those savings, and drop our investor fees to $25 per investment and 10% carry! We aim to profit when you do: on a successful investment. That way our incentives are aligned, and we can focus on attracting high-quality companies.
On a sad note, the recent change in law affects only accredited investors.... for now. It's legal for startups to advertise their fundraising, but it will be mid-2014 until unaccredited investors can invest. So, if you have less then $1M in net worth or earn less then $200k a year - hold tight! It'll be at least 9 months until you can make investments. (We're sorry; we're as bummed as you are.)
On September 23rd, for the first time in 80 years, startups will be advertising their fundraising to the public. Facebook ads, tweets, Techcrunch articles, a demo day live-streamed to the 8m+ accredited investors across the US – it’s a whole new world. Previously, most of us never had a shot at investing in the rounds of the best companies. The insiders only had that kind of access. That's all about to change.
We think that’s a great thing. More Americans backing innovation helps our country. And, as a founder, giving your most passionate users an opportunity to invest alongside your professional investors is good for your startup. Win-win.
But there's a whole bunch of legal stuff for founders to understand. So let's dig in.
Rule 506(c) is a new exemption rolled out by the SEC which allows general solicitation. The exemption that startups relied on to raise financing over most of the past century - which bans such advertising - is now known as Rule 506(b). Startups can choose between 506(b) or 506(c) when they fundraise.
The major difference with 506(c) is the higher standard for ensuring that every investor in the offering is accredited. For both types of offerings, you should have a "reasonable belief" that an investor is accredited before accepting their investment. With 506(b), founders often take the investors own word, and take relatively few steps toward verifying it. That standard isn't good enough for 506(c); you must also take "reasonable steps" to verify that your investors are accredited.
As financings become more transparent, we expect 506(c) to gradually become the new standard. Before, the difference between a public and a private solicitation was murky, and regulators did not always pursue activities that blurred the line towards public solicitation, but there's no guarantee this will continue. Have you been on AngelList while actively fundraising, and then someone tweeted about it? Ever had a demo day pitch video uploaded to Vimeo? Those are technically the general solicitations that 506(c) was designed for. 506(c) is the safer way to go.
The SEC purposely did not define what "reasonable steps" to verify accredited investors actually means. In their own words, they don't want to force us "...to follow uniform verification methods that may be ill-suited or unnecessary to a particular offering or purchaser in light of the facts and circumstances..."
While this adds ambiguity and makes life more difficult until clear norms are settled on, this is actually a good thing, as we all can use common sense! It would be silly if Ron Conway was forced to provide tax returns when investing. He's Ron Conway!
You can verify that he's an accredited investor with ease: Google him!
Here's some guidance the SEC has provided on the types of information you could reasonably rely on to verify that an investor is an accredited investor:
The SEC stated this is not an all-exclusive list. We feel there's also a good argument that you took "reasonable steps" if you found the investor was:
In other words, we interpret "reasonable steps" to be exactly that: reasonable.
We do most of the work for you. What startup founder has time to deal with this stuff? You have better things to do then asking potential investors for tax documents.
The SEC wants to see third-party verification marketplaces form. That's us.
When you fundraise via Wefunder, we verify that everyone who invests in your company is accredited. If it's needed, we'll handle asking for any tax forms, bank statements, or letters from accountants.
The SEC does require that you have a reasonable basis to rely on the judgment of any third-parties. If requested by your lawyer, we'll provide all of our methodology for determining accredited investor status on Wefunder. It's quite boring reading. Lawyers like that stuff.
You might have heard talk about a 15 day waiting period before fundraising or additional paperwork required for 506(c) offerings. These are in the proposed SEC rules (not the Final Rules live on September 23rd). Given the almost unanimous opposition and lack of a clear reason for their existence, we don't expect these rules to ever be voted on in their present form. Either way, the vote is months away, and we expect the proposed rules will not be in effect on September 23rd.
The SEC staff wrote these proposed rules from the perspective of how Wall Street raises money without understanding how startups are financed. During this comment period, they are hearing from the startup community. We expect them to correct the proposed rules, since they are "reasonable" people who try to do the right thing.
What happens if one of your investors turns out to be not accredited? As long as you had a reasonable belief at the time of taking the investment and you took reasonable steps to verify that the investor is accredited, you still can rely on the 506(c) exemption. Mistakes happen.
But, if you actually knew an investor you accepted was unaccredited at the time or did absolutely no diligence.... well, that's a Very Bad Idea. Don't do that. You'll lose your federal exemption, and will be spending a lot of money on lawyers.
If you enjoy reading government documents and want to check out the source, download the SEC Final Rules and jump to page 31 or so. Have fun!
Or, you can sign up for a Wefunder plan, and let us worry about the details.
This morning the SEC voted YES to make Title II of the JOBS act a reality. This will remove the ban on General Solicitation (effective September 23rd), allowing companies to publicly promote their fundraising rounds. We're going to see some exciting changes to the startup ecosystem!
For the past eighty years there has been a ban on what's called General Solicitation. A company that's actively fundraising couldn't publicly say so. The law required them to talk to investors individually, essentially closing off investment to all but the well-connected (and those with the time to meet with hundreds of individual entrepreneurs).
As a founder the general solicitation ban makes it harder to find investors. Raising money is a high-touch sales process and your lead gen doesn't scale well. It's a slog. Fundraising is a soul-sucking process of meeting after meeting that is very time consuming and distracting.
As an investor the general solicitation ban hurts deal flow. There are great companies out there fundraising today and you simply won't hear about them. Knowing the right people matters and you need a strong enough reputation so that the good founders reach out to you. Deal flow makes or breaks your portfolio.
Early-stage investments are very risky and so it's important to diversify your portfolio. But as an investor it's hard to make many small bets, unless you consider $25k a small bet. Founders won't pitch you for a $1k check, their time is better spent chasing $25k-$100k investments. So to keep your portfolio diverse you need to be willing to invest hundreds of thousands of dollars. Learning is expensive when you're new to angel investing.
Title II changes the landscape because it makes general solicitation legal.
This enables founders to play a different fundraising game. Creating a public fundraising profile and promoting it through Twitter and Facebook. Getting press about a celebrity investor who just invested (and tactfully mentioning the round is still open). Running well-targeted ads on Google and Facebook to find doctor-investors for a innovative medical device company. Founders can better apply the power of Internet marketing to draw in accredited investors, helping them raise more money faster.
Pitching goes from one-to-one to one-to-many.
As an investor your geography and personal network matter less. You can live in Kentucky and invest in biotech in Boston. You can be a part of those fundraising rounds without a well-groomed personal network.
And it becomes practical to invest in smaller increments. This is a big deal.
When a company raises a crowd round they're happy to take a $1000 check from a lot of diverse investors. In fact they want a bigger network of advocates. With platforms like Wefunder the economics are different here because founders are able to tap a larger pool of prospects and folks can invest asynchronously.
When you can invest $1k in 25 companies you spread your risk more as compared to traditional $25k investments. You can make faster decisions without hours of in-person diligence. The cost of making a bad bet is smaller. This lowers the barrier to investing cross country, growing your selection pool.
Fundraising and investing are about to get a lot more interesting.
After raising funding for four startups, we've learned a lot, and have decided to start charging.
Unlike AngelList, we don't believe charging startups $10,000 and $250 per investor (25 percent of the funding when most investments are the minimum $1000!) is a good idea. No sane startup founder in their right mind would pay that price unless they had no other option. Are those the investments you really want to make?
There's a better way.
We've registered with the SEC to be an investment advisor, taking advantage of a new exemption in Dodd-Frank for online venture capital funds. Our friends at FundersClub had the same idea, and kindly paid some big bucks to their lawyers to get a No Action Letter from the SEC! Thanks guys! We owe you one!
From this point forward, following the guidelines provided by the SEC, we will charge 20 percent carried interest. This means we'll share 20 percent of the profits if your investment is successful. And if it's not successful? We make nothing.
We like this model because it aligns our incentives. We only make money if you do, and we're in it for the long haul. There's no incentive for us to put crappy deals on Wefunder to earn transaction revenue.
To cover the costs, there's also a small administration fee of between 3-7 percent, depending on how much you invest. This pays for things like setting up the WeFund LLC, franchise taxes, banking, accounting, legal, and custodial fees. We don't earn any revenue out of this fee.
We have a lot of startups in the pipeline, and we're excited to show them to you!
One of the coolest parts of my job is that I’m always around startup founders who are crazy enough to think that they can change the world.
I love listening to their stories. How did they get started? Why are they driven to do this? What obstacles have they battled through? The best founders can entertain me for hours… and I almost always feel revitalized afterwards. A little bit of their energy rubs off on me.
Starting today, we’re going share this experience. Each week, we’ll pick a startup that inspires us, and work with them to create a beautiful multimedia story, so we can share that inspiration with others.
For the very first Startup of the Week, we picked Wevorce, founded by Michelle Crosby and Jeff Reynolds. Michelle is working hard to make divorce a bit more friendly, especially for the kids. It's both important, and has the potential to be a pretty good business, saving ~50% off the average divorce legal bill. But I like it most because of Michelle's very personal reason for starting the company. You can sense her drive. She won't quit.
As for ourselves... we started Wefunder so that everyone – not just the wealthy - can support startups with their time and money. We feel, that in our society, that’s one of the best ways to encourage more innovation, more jobs, and, well, more progress.
Thanks to the JOBS Act, sometime in 2013, this will finally be legal. But the SEC has delayed implementation of the regulations that will allow us to get started with public fundraising. So, until then, we hope you enjoy the stories!
It’s been nearly a year since Wefunder launched a petition to Congress to legalize crowd investing.
It’s almost here.
The SEC is expected to implement the first part of the JOBS Act, enabling ‘accredited crowdfunding’, in January. For the first time in 80 years, it will be legal to advertise investment opportunities to the general public. This is a game changer: a broader segment of our society can now help fund startups. Innovation is no longer dependent on a few thousand angel investors in San Francisco.
To take advantage of the new law, Wefunder is launching the Startup of the Month in January. We’ll tell the story of some of the most promising startups around the country… and then give you an opportunity to invest alongside the lead investors in smaller amounts.
Unfortunately, only accredited investors will be able to participate for the first few months. The second part of the JOBS Act – enabling anyone, regardless of wealth, to invest – won’t be fully legal until the spring of 2013.
One more thing. Wefunder has raised a round of founding… on Wefunder.
We built Wefunder for ourselves. We built it because we desperately wanted to invest in startups we cared about, and thought it was silly that it was illegal.
But we also built it for startups. We believe that having hundreds of investors is a good thing. This is a community of passionate supporters, an army of evangelists who want to help you succeed.
So, we ate our own dog food. Using current state “blue sky” laws (which prohibited advertising), we raised $533,800 from 58 investors in amounts ranging from $100 to $100,000. Half of these investors were un-accredited. As far as I know, we're the first crowd-funding platform to do that!
We’re pretty stoked. And we’re looking forward to doing some awesome work in 2013!
One of the most important ways that the JOBS Act helps entrepreneurs is through something called general solicitation. As a result of the legislation, January is likely to mark the first time that startups will be allowed to publicly advertise the opportunity to invest in their companies. This will make it much easier for them to find interested investors, and reduce the amount of time it takes to close a round.
Most of us don’t learn that a startup is raising money until after their round has closed. That’s because right now startups are prevented by law from publicly advertising the fact that they are raising money. They cannot post an investment opportunity to social media, ask a reporter to write about their fundraise while it is still open, or even make an announcement in front of a public crowd.
The JOBS Act eliminates this ban on advertising, but the SEC needs to write rules before the law goes into effect. Those rules should be published in January, meaning that all the advertising activities that are currently illegal for startups to engage in will become fair game. Startups will be able to advertise investment opportunities to anyone, but they will still be restricted to accepting money from accredited investors until sometime around April when another part of the JOBS Act takes effect that enables every American to invest in startups.
Today entrepreneurs have to spend a huge amount of time networking their way to investors that might be interested in their startups. This high touch process means that the vast majority of potential investors simply never hear about the opportunity to invest. Unless the investor is only a few degree of separation away from the entrepreneur, its unlikely that they will even hear about the deal. Only 3% or 256,000 of the 8 million accredited investors in the US are active angels, and those angels invest $21 billion each year. General solicitation will enable entrepreneurs to broadcast investment opportunities far and wide, giving those 8 million investors a chance to find out about startups that interest them while they still have the opportunity invest, and a clear way to reach out and make it happen.
This is a guest post by Loretta McCarthy, an investor and managing director at Golden Seeds . You can follow Loretta on twitter at @lorettamccarthy
There is much mention of the merits of investors focusing on women entrepreneurs. Yes, it is a way of fostering equality and thus doing good, but that isn't enough for those who are putting capital at risk. There are important aspects of gender investing that are relevant even if the investor hasn't embraced the concept of improved equality.
Women entrepreneurs nearly always produce more diverse management teams. It is widely acknowledged that diverse management teams, on average, achieve higher levels of profitability. A study by Catalyst, "The Bottom Line: Connecting Corporate Performance and Gender Diversity", concluded that companies with the highest representation of women on their top management teams experienced better financial performance than companies with the lowest women’s representation. This finding holds for both Return on Equity, which is 35 percent higher, and Total Return to Shareholders, which is 34 percent higher. A recent study of US venture-backed companies by Dow Jones Venture Source, “Women at the Wheel: Do Female Executives Drive Start-Up Success?”, concluded that a company's odds of success increase markedly as the portion of women executives increases. In study after study, it has been found that companies with greater gender diversity outperform those with less – frequently by as much as 30%. Clearly, the debate has shifted from an issue of fairness and equality to a question of superior performance. That alone is a reason to invest in women-led companies.
It is clear that despite the rapid rise in women-led businesses, and the convincing data above, many such companies are still underfunded. Although women own about one-third of all US small businesses and start companies at twice the rate of men, according to Dow Jones VentureSource, only 11% of venture-capital funding goes to female entrepreneurs. There may be many reasons for this. The most common explanation is that most venture investors are still men and they are less familiar with investing in women. Maybe those women are also less familiar with navigating the investing terrain. Perhaps their business concepts don't sync with the sectors that many angels are seeking. Why should Wefunder investors care about this? Simply because you may be overlooking some great opportunities if you are not considering women entrepreneurs. To have a complete portfolio, it is wise to evaluate the many interesting opportunities available through women entrepreneurs.
Golden Seeds is a NYC-headquartered national angel group which finds, funds and mentors women-led companies. We have learned that focusing on women-led businesses will produce investment portfolios with diverse management teams of both women and men, which is our ultimate goal. We have learned that this approach attracts substantial capital from both women and men who want to consider the many outstanding opportunities they may not encounter elsewhere. This level of commitment is driving more capital to women-led companies, a trend worth noting for Wefunder investors and many others.
At Wefunder we love companies that solve important problems, and few problems loom larger than solving the US health care crisis. Rock Health has assembled a set of reports that describe the inefficiencies in our health care system and the opportunity for entrepreneurs to build startups that address them.
According to Rock Health, by 2020 20% of US GDP will be spent on health care, and nearly half of that spending will be wasted as a result of inefficiency. To name just a few areas where startups can help. patients have difficulty obtaining information, are regularly forced to fill out duplicate forms, and often undergo repeat procedures unnecessarily.
The report goes on to say that half of consumers claim they would pay for mobile health technology, and that analysts believe digital health to be a $14 billion market. If you are interested in investing in startups that improve our health care system, flip through the slide show below and learn more about where the opportunities might be.
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