There’s an old saying that you should “invest in what you know,” but what’s far more valuable is when you can “invest in who you know” as well. The new crowdfunding laws are not designed to nurture this; they are meant to prohibit investment conversations with the company insiders when the opposite has historically been the case.
Wealthy individual investors and funds (angels and VCs), will often do both, and it makes a lot of sense, when you have the time and the wherewithal to afford due diligence, apply your previous experiences, and meet with the founders or senior management to determine whether an investment is a good one. A secondary benefit to this approach is that you often get to insert your previous knowledge (i.e. what you know) into the equation, because you have invested enough to have a voice.
Aside from reading the company’s reports, the other main component to making an investment decision is the ability to get to know who you are investing in. This is arguably the more important component, especially for those with limited amounts to apply toward investing. But does this mean that all of the new opportunities to make investing available to everyone via crowdfunding helps us in this regard?
The last few years have been exciting ones for those following new crowdfunding laws at both the state and the national level. I am not speaking to donation-based crowdfunding here (such as Kickstarter, Indiegogo and the rest) but rather investment crowdfunding (that involves actual return on investment).
When the JOBS Act was passed and as we watched and waited to see what rules our federal government would create, the states took earlier actions to implement their own forms of state-based securities crowdfunding. However, many of the new rules are going in the exact opposite direction of how investing has historically been done, and those rules have created more barriers, not fewer, in terms of getting to know who you might invest in. For examples, the JOBS Act rules (and those of many states) that require a company to only post their offering onto a third-party “intermediary” platform, and that limit what a company can say directly to its potential investors, creates such a barrier.
Investing has almost always been more interaction than any reaction to data before a transaction is completed, where the personal aspects of the interaction weigh heavily in favor of any successful transaction. How many times have we used, heard or relied on the old adage that you need to look someone in the eye before you can do a deal with them? In this modern age of SEO, and the multitudes of interweb communications, there are still many dealmakers that need to meet, and should be able to meet, the other person first before any deal gets done. The same has held true for our investing in other businesses since the dawn of investments began, and still holds true today.
Consider most companies that raise funds privately, through a broker-dealer, or even those that go public via a IPO. In each and every case, the company or its representatives sell those offerings, and the investors only buy (invest) if they can get to know the team. With private offerings, the company goes directly out to the accredited investors that already know them, or to whom they have been introduced. Broker-dealers help companies with their offerings by introducing them to investors they know, and those investors then get to know the company. And broker-dealers are supposed to ensure that the deal is suitable for every investor they bring in. Even IPOs have a personal connection component. The main underwriter will take the company team out on a roadshow, and introduce the team to its potential syndicate of other dealers to bring them in to an IPO. Those potential dealers put a lot of weight into meeting that team, and likely would not consider investing without a chance to get to know them personally.
But not all securities crowdfunding takes the unfortunate approach that you need to separate the company from the investor and utilize technology platforms in the place of that person interaction. In addition to the Direct Public Offerings (DPO) that have been around for decades, there is also, for example, the new Oregon Community Public Offering (CPO). DPOs are federally exempt offerings that must be filed with any state in which the offering is conducted, either using a federal exemption that currently limits the raise to $1m (but allows you to file in multiple states), or what is known as the Intrastate Exemption that typically has no dollar limit but requires the company and all investors to be in just one state. The Oregon CPO, which was championed by Amy Pearl and Hatch Innovation, was designed to be a community capital raising tool, and companies are actually encouraged, not discouraged from raising those funds directly from their communities via meet-ups that actually allows people to look the CEOs in the eye.
Whether it’s a DPO, CPO, or another kind of offering that provides for and encourages direct and interpersonal connections, an investor is provided with a very valuable opportunity to meet the people behind the veil and to use their own personal assessments in addition to what a company states in its materials or ratings it’s received. And those personal connections then make a significant impact on those inside the company who are taking investments from people they now know. The decisions companies make are likely highly informed by how connected the investors are to them. And while we have not experienced DPO investors who have abused that personal connection, what we have seen is a deeper, richer and more connected community as a result – a community of investors and companies who actually know each other