Although not yet fully implemented, the JOBS Act promises to be a complete game-changer for the capital markets. I don’t think we’re truly cognizant of how huge the opportunity equity crowdfunding presents to both investors and entrepreneurs alike. As many have touted, it truly democratizes capital, providing needed liquidity to both nascent and established businesses alike. Even when crowdfunding becomes fully integrated into the complex and regulated financial system, the portals will still be required to follow the rules of engagement. But massive opportunity awaits them. And, while there are a number of crowdfunding portals out there, I’ve chosen to focus my attention today on the folks over at Equitynet.
My reasoning is threefold. First, I’ve used their proprietary system and have found it very straight forward for crafting business plans that are easily comparable side-by-side. Second, I believe as one of the original and oldest portals with a large number of accredited investors in their pool, they’re strategically poised to take advantage of the previous and future implementations of the JOBS Act. Third, I think there are several ways Equitynet could drastically improve their current model. What follows are a few finer points which Equitynet may already have plans to implement and a few which they may not have considered in assisting mid and micro cap companies and their investors in recognizing better outcomes.
Licensing as Broker Dealer
The offering of securities is a serious business with grave consequences for the un-registered and particular to the unscrupulous. Today Equitynet remains in the same realm as folks like Fundly. Other equity portals have simply partnered with a broker-dealer for the offering of securities, but some, like Crowdfunder.com have actually passed through the costly process of becoming licensed. I’m sure Equitynet likely sees the writing on the wall and has plans to do so in the future. This will become especially beneficial as the law revolving around the selling of securities via crowdfunding to both accredited and non-accredited investors becomes more clear.
Exit Planning for Both Investors & Entrepreneurs
Investors are looking for a return on their capital. And a proper ROI or IRR most often requires an exit strategy. Unfortunately, most investors are not like Warren Buffet, they don’t buy with the intent to hold in perpetuity. Consequently, entrepreneurs and capital providers need to settle on a proper exit strategy, including how the exit will be performed, who will facilitate the process, when it will occur and then work out a plan to execute.
I consider it foolhardy to enter any investment relationship with an entrepreneur, especially through crowdfunding, with no exit strategy. This is especially true for the non-accredited investor who may not be able to bear the risk of loss as well as a wealthy investor. Equitynet could partner with firms that provide exit planning for small business or those who facilitate the sale of businesses, combining their current solution with the likes of Bizbuysell.
Taking Crowdfunded Companies Public
I’ve spoken about it before, but Mike Volker says it better than I ever could. In short, crowdfunding will simply be another avenue for going public for mid-cap and microcap companies. Let’s paint a fairly likely “what if” scenario for a crowdfunded company.
ABC Widgets, Inc. raises $6 million in a first round offering from Equitynet. The total round includes some 1,200 accredited and non-accredited investors. Five years later, the company fails to meet its pie-in-the-sky goals laid out for it in the original business plan. The business is still operational and profitable, but nowhere near the original promises made by the founding entrepreneurs. Investors realize the business has reached its pinnacle and they want out. The question is, what is the most efficient way?
Current law states that the shareholder threshold for privately held businesses is 500. The JOBS Act extends that number up to 2,000 before ABC Widgets, Inc. is required to begin reporting to the SEC. Additionally, the JOBS Act allows for, but does not give a solution to, shareholders to sell their private shares after a certain time period. In other words, they can sell them publicly, but no public market is available. Enter reverse mergers. Going public through the inexpensive option of performing a reverse merger presents an opportunity for Equitynet, especially if they’re already a licensed broker-dealer. It’s not a double, but an opportunity to triple-dip on customers in a way that provides an entire value chain of services. As a deal-maker in said deals, Equitynet could provide a suite of solutions from startup to value-added exit for both investors and entrepreneurs.
That’s what I would do if I ran Equitynet. What would you do? How would you do it differently?