There’s been a lot of talk about investor education in crowdfunding deals, so I thought I’d take a couple moments to write about what I look for when investing.
Before we dive in though, please know that I am NOT a financial advisor or any sort of investing or wealth management expert. You should not rely on anything I say, and I am not endorsing anything I’ve bought. You should consult your own financial advisor about what you should invest in, and invest with the knowledge that you could lose your entire investment. And lastly, as a crowdfunding attorney, as a matter of policy and to deter any conflicts of interest, I do not invest in any companies for whom I act as legal counsel.
Everyone seems to call Regulation Crowdfunding ‘equity crowdfunding.’ That’s a misnomer—it really should be called ‘investment crowdfunding.’ Regulation CF is not limited to equity, and in fact, for many companies, they would be better served with taking on debt. Debt crowdfunding is, essentially, taking one large loan from the crowd (instead of, say, a bank). On one hand, I think a company that chooses the crowd over a bank is making a strategic decision to build community. And if they’re able to properly leverage their crowd, they can help grow their own business. On the other hand, as an investor, I love getting paid back more quickly. Equity offerings have a longer lifecycle—often 5+ years, if ever. They require an acquisition or IPO, and many companies will never IPO, meaning you may never get any return on investment. With debt offerings, you can begin getting paid earlier in the lifecycle while the company is actually doing business.
2. Reg CF-Into-Reg A Deals
As an investor, I personally won’t invest in any Reg CF deal that says they’re going to use the money I invest with them to go pursue a Reg A offering and solicit more investors. That’s not the way I like to see folks do business. I’d much rather they take the money, concentrate on getting more traction or perhaps offering new products, and otherwise growing the company. If, at the end of the day, the company has become more successful and the business merits raising more capital, then they should go raise a Reg A. But I generally frown upon the Reg CF-to-Reg A jump because, most of the time, I don’t think the additional raise is justified.
3. Revenue Sharing
While I generally like royalty or revenue-sharing agreements, one has to be careful as an investor. The more money that’s invested in the offering, the less each investor gets when revenues are paid out, since all investors share in the same percentage of revenue. That is, unless the revenue-sharing agreement is drafted in such a way that solves this issue.
4. Portfolio Aggregation
I’ve invested on multiple platforms and in multiple deals, so I’m pretty sure that I’m soon going to forget and soon will not be able to keep track of my investments anymore. So, I’m testing out NewChip’s app which, among other functions, allows one to track and manage their portfolio across multiple platforms. It’s lessening the pain around keeping track of multiple investments, usernames, and passwords. Full disclosure that NewChip is one of my clients, and I am one of their legal counsel.
Amy Wan, Esq., CIPP/US is a Partner at Trowbridge Sidoti LLP (CrowdfundingLawyers.net).