Start-up crowdfunding a bigger mitzvah now, thanks to the SEC

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The Times of Israel  |  By David Shamah September 26, 2013, 9:08 pm

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New US investment rules will allow organizations to get more small investors into the game of hi-tech investment – and just in time, says Israeli funding expert Jon Medved

A just-implemented U.S. investment rule change promises to make tech investing a lot more popular among a lot more people than it has been until now.

The JOBS (Jumpstart Our Business Startups) Act was signed into law by President Obama in April 2012, but only implemented now that the Securities and Exchange Commission has finalized investment rules. The law now allows start-ups to solicit investments publicly, enabling them to reach far more potential investors than before.

And for Jon Medved, founder and CEO of OurCrowd, the law is far from just a technical change in rules regarding investing — it’s an opportunity to do an perhaps the most important mitzvah (good deed) in Jewish life.

The JOBS Act contains a number of provisions, but for Medved and other crowdsourcing pros, the key change is the lifting of a ban on “general solicitation” (ie advertising) of certain securities and investment vehicles. Private companies and entrepreneurs in the U.S. seeking to raise capital will now be able to market their company’s investment opportunity publicly to “accredited investors” (individuals with over a million dollars in liquid net worth or incomes over $200,000/year) via social media, print materials, email and other means.

There are also limits on how much of their money solicited investors can invest. Violation of the rules by either companies or investors could result in their being banned from investing altogether (and blacklisted by the SEC) for a year or more.

Previously, start-ups could take money from any accredited investor – but only if the investor approached the company, either directly or through a broker. The only way companies could pitch investors directly was at a tech event, where companies would present their ideas or products to groups of investors – and again, it was assumed that those invited to such events were moneyed enough to invest.

Related:  Bridging the Funding Gap

The tough SEC rules on soliciting accredited investors were implemented in order to ensure that the system is not abused, said Sherwood Neiss, Principal of U.S.-based Crowdfund Capital Advisors. On a recent visit to Israel, Neiss said that the SEC rules “include numerous safety valves, such as the asset requirement for investors, a background check on companies doing the soliciting, registration with the SEC, a comment period in which the public can post misgivings about the investment, and more.” The SEC very much wants this program to succeed, Neiss said, “and is trying to ensure that it weeds out the charlatans and crooks” that many critics of the bill believe will come out of the woodwork, using social media to solicit investments for phony companies and projects.

The crowdfunding model sees investors pooling resources to reach the sum a start-up is seeking in a funding round. While crowdfunding makes a lot of sense — in enables cautious investors to share the risk in a start-up with others — the model has only become popular in the past few years; previously, nearly all start-up investments were provided by venture capital firms or angels, individuals who would supply funds in exchange for either a share in the company or other substantive benefits. In the crowdfunding model, a firm coordinates the investments and takes the equity, if any, which it holds for the investors, who get paid off their relative share of the profits in the event of an exit.

Related:  Crowdfunding is essential for SMEs, innovation and job creation

Under the new SEC rules, companies still cannot offer equity to individuals they solicit via ads or social media — but crowdfunding firms can make those deals. Thus, the crowdfunding firms, which can make such deals, stand to be among the biggest beneficiaries of the rule change; they will be able to solicit accredited investors via social media and other methods, allowing even small investors to “get in the game.”

That’s a good thing, said Medved; the investment game needs new blood. “One of the biggest problems for start-ups in Israel and elsewhere is the ‘series A crunch,’ and that’s a problem crowdfunding can help solve,” said Medved. “Many companies are able to get seed money from an angel, but they have a much harder time getting their next round of financing, either from angels or VC firms.” With the riskier business climate, investors are much more careful today, and too often a good idea that could turn into a big business falls by the wayside for lack of funding.

“In Israel, only a third of startups get past the seed stage to Series A funding. With crowdfunding we have been able to substantially increase the pool of potential investors for Series A and subsequent investment rounds,” and now that public solicitation is permitted in the U.S., that pool could increase substantially, added Medved.

OurCrowd has been extremely successful at raising money via crowdfunding; the firm has raised over $20 million for its 26 portfolio companies in a period of just six months. “Funding is just the first level of engagement with the crowd,” said Medved. OurCrowd assigns experienced mentors to work with each of our companies, often taking board seats, and we play an active role in helping our companies grow. We encourage our investors to pitch in by helping the companies, and this has borne fruit with dozens of introductions and strategic connections being made as a result of the crowd’s help.”

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