Avoid Those Urging Startups to “Get ready for Investment Crowdfunding Now”

by Crowdfundinglaw

In May of last year, the month following passage of the JOBS Act, I warned startups to watch the hypsters who were urging startups to sign up on portals and get ready for investment crowdfunding.  I pointed out that these would-be investment portals were far more interested in what they could do for themselves than what they could do for your startup.  At the time, portals were trying to show potential investors that they had deal flow and they were trying to establish their own brands.  The problem is that this was being done at the expense of startup companies that were being misled about the fact that they could count on investment crowdfunding to solve their near-term capital needs.  The reality was that anyone who knew enough about the issues that remained before investment crowdfunding could be effectively and economically used to raise capital were far too speculative and far too distant for cash-starved startups to wait.

Fast forward to now and absolutely nothing has changed.  In fact, there seems to be an even greater number of advisors, event promoters, service providers and potential portals pushing the “act now” or lose out mantra.  This is simply garbage.  My suggestion is that companies and founders use the same rules that credible modeling agencies tell parents about shady child modeling agencies.  If “getting ready” means paying someone money, you probably should take a pass.  If someone is telling you that investment crowdfunding is soon going to work for companies seeking investment, or for investment portals, or for broker-dealers, or for investors (accredited or otherwise), they are either uninformed, irrationally exuberant or ripping you off.  Pursue your other funding options as if investment crowdfunding is not your solution.  If that changes, you might want to pivot toward crowdfunding–just don’t count on it to be a solution based on what we know now.

If you are dealing with a portal this is actually raising capital now using a state securities exemption or as a broker-dealer, that is potentially a different matter.  You can check the track record and conduct due diligence on their representations.  I would also make sure an independent attorney is engaged by your company to make sure that the offering does not violate what is legal under the state law or under the laws that remain applicable to accredited investor solicitations.  As I have pointed out, there are portals out there that are, to be kind, working in a gray area.

The unfortunate reality is that many of these sales pitches are still being done by those who want to be paid now for something that is far too uncertain.  We still do not know if accredited investor crowdfunding can work for accredited investors, who may be asked to provide so much personal information to establish that they are accredited that they will refuse to invest. We still do not know if broker-dealer costs structures can accommodate the costs relating to client obligations and a whole host of issues associated with broker-dealers–especially for small offerings of less than $2 million.  We know absolutely nothing about whether the “investment portal” sector will work at all.  We know absolutely nothing about whether Title III crowdfunding will be cost-effective for issuing companies or for portals.

In short, we still do not know anything that is of practical value relating to JOBS Act modifications to securities laws.  This is driving many in Congress crazy right along with the rest of us.  But be smart in the interim and do not count on investment crowdfunding until it is proven to be workable.  By all means, do not pay money to people who are trying to profit themselves whether crowdfunding is workable for you or not.