There may only be one thing in this article I can agree with, which is that the legislation that became Title III was poorly written and hastily approved. Only the most courageous in our Congress were willing to see the many problems with this approach and to vote no to something called the “JOBS” Act during an election year.
Yet here is a classic example of wanting to throw the baby out with the bathwater. The bathwater in this case is the Title III JOBS Act, which was not originally intended to be what it ended up becoming (the original petition was to simply allow entrepreneurs to raise only $100k with no more than $100 from any individual – Period).
The Baby, in this metaphor, is the concept of raising a modest amount of funds from anyone, and that has been around far longer than any federal securities law – and was in fact a carved-out exemption from those same laws from the 30’s. I speak here of Direct Public Offerings, which are and have been a legal form of crowdfunding for many decades, and which have been proven successful for many.
Unfortunately, neither Mr. Saska nor the law professors he quotes have done their homework on this one. For Professor Dorff to say that securities crowdfunding is a disaster waiting to happen means he is not aware of the intrastate exemptions that have been anything but disastrous. And Mr. Saska’s unfortunate misogynist metaphor stating that “no amount of lawmaking lipstick will make this statutory pig pretty” shows that he is also unaware that legitimate securities crowdfunding already exists and is quite healthy.
Not only that, the costs of doing a Direct Public Offering via an intrastate exemption or pursuant to Reg D are much lower than the estimates he quotes from the SEC for the new Title III JOBS Act. We have been doing these DPOs for $25,000 all in, no matter what the top dollar raise has been, and if companies join in our bootcamp approach and are willing to do parts of it themselves, we can cut those costs in half or more. So if an entity raises $1m, that is 2.5%. If they raise $5m, that is ½%. That’s quite different than what Mr. Saska throws out based on his “estimates” for crowdfunding.
Mr. Saska then compares the estimated costs of crowdfunding to doing a large public offering. Why would anyone even remotely consider those two as comparable? But just for fun, let’s consider his statement. First, where does this 4% figure come from? Underwriting fees have come down from the static 7% figure previously used by all underwriters, and there have been one or two IPOs where the status and size allowed for significant reductions, but the number is still hovering well above 6% – and that’s just for the underwriters fee. Add in legal, accounting, auditing, advisor, printing, new financial systems and incentive plan costs just to prepare for an IPO, then add in new employees, ongoing reporting, marketing, disclosure, investor relations and other information, effort and attention taken away by senior management. And these are only some of the costs incurred to go through an IPO.
Mr. Saska then makes an unfounded statement that “Crowdfunding won’t significantly improve the supply of investment capital, and the capital that crowdfunding does supply won’t significantly improve the bank accounts of investors.” What data is he referring to here? This is a completely short sighted and unfounded statement. If crowdfunding were done well (in my view, keeping it regulated by the states who actually do a great job) and DPOs were to become a source for funding to hundreds of thousands of small companies, how can you say that it will not improve the supply of capital to those small companies? And why assume that investors are only looking for the next big hockey stick gains when they are investing to support their local community venture?
Mr. Saska has an incomplete understanding of how successful companies have been utilizing the DPO crowdfunded approach, and why those non-accredited investors are exactly what the company wants as their shareholders and loyal fans. Rather than the “desperate” company that he has concluded, we have seen many happy and healthy companies use this tool to expand their business, while at the same time spreading the word about their venture and bringing in many happy and loyal investors who remain customers and fans.
And in his attempt to diminish this community-funded approach, Mr. Saska treats the mom-and-pop investor as being fools for allowing some of their savings to be “separated” toward these investments. Does he not understand that the very basic reason for a market is to create an efficient transfer of people’s investments to companies that need funds for research, development and growth?
Mr. Saska then again quotes Professor Dorff’s view of how a successful angel investor waits for that 10% of companies to bring back large returns, as if that approach is anything new. Venture Capitalists have been supposedly employing this very same model for decades – mostly unsuccessfully of course (here’s a big secret – the VCs actually make most of the money on the management fees they charge other investors). But where is his data on those successful Angels?
Worse, he uses the angel concept to then assume that 1) a non-accredited investor is incapable of using the very same model by doing their own due diligence and review, and 2) the motivation of the non-accredited investor will always be the same (even though they are incapable of mirroring it). In our experience, the non-accredited investors are investing in their own community of businesses and they are happy with the Return on Community coupled with a modest return on investment. Unfortunately, I don’t think Mr. Saska has done the research to understand this.
He also shows a poor knowledge of securities law by saying that Reg D disclosure requirements are relatively nonexistent (he is confusing what a company must report to the SEC (very little) with what a company must provide to invesors (quite a lot)), and that those companies are subject to the same anti-fraud laws as anyone else. But he also does not understand that if a company raises funds from too many investors, they will trigger the public reporting rules.
It’s also unfortunate to see Ryan Caldbeck from Circle Up adding his opinions to this piece. Mr. Caldbeck believes that “attractive” companies (whatever that means) will never want investments from non-accredited investors. I take that to mean that Mr. Caldbeck would consider Ben & Jerrys and Annies Homegrown to have been unattractive because they originally raised their funds using a DPO. And contrary to what Mr. Caldbeck says here, the DPO model did work for those companies, and continues to work for others. Not every company wants to get taken public or be bought by a giant, and not every investor is only thinking of how much more they can pad their savings account.