I wrote a post for the HIMSS blog in the week leading up to the…
The SEC has finally finalized its crowdfunding rule (presser) under the JOBS Act. The health innovation crowdfunding crowd has been waiting for these rules for quite some time, as has the rest of the crowdfunding fan club. (It’s only taken three and a half years.)
So, was it worth the wait?
The crowdfunding rule (full text) sets the stage for broader participation in early-stage investing and may empower crowdfunding platforms (“intermediaries,” in SEC-speak) to compete with angel funding platforms servicing “accredited investors” (SEC-speak for high net worth folks who can afford to lose their entire investment in a startup). It is a democratizing move consistent with the ethos of the internet and digital innovation.
Let’s look at some of the particulars and then think about whether this is a good thing for startup companies (“issuers”) that might want to sell securities rather than their products or promotional T-shirts, and for intermediaries — such as Kickstartr etc. — that might want to have a role in matchmaking individual investors with issuers. (Kickstartr itself has reportedly said it’s not interested in going down this path; IndieGoGo is interested, though.)
The rule provides:
Clearly, while opening the gates to broader participation in equity financiang, these rules add significant burdens to startups seeking crowdfunding and to intermediaries operating funding platforms. Some of the freewheeling vibe may continue (in issuers’ “description of business” or discussion boards on the intermediary’s platform, for example), but communications by intermediaries will be limited to the information contained in traditional “tombstome” ads in financial publications, and intermediary investment positions in issuers will be pretty much limited to payment in securities for services provided by the intermediary. There will be a significant compliance burden, and folks active in this space are not accustomed to that.
It will also be interesting to see how much attention crowdfunding attracts among traditional broker-dealers. They would likely be able to satisfy the regulatory requirements for establishing a crowdfunding platform relatively easily, and may eat the crowdfunding pioneers’ lunch if they aren’t careful. Some sector-specific crowdfunding platforms have previously aligned themselves with more broad-based platforms (e.g. Health Tech Hatch and IndieGoGo); that trend may continue, and we may also see other sorts of alliances that crowdfunding platforms may develop with angels, angel funding platforms and/or traditional broker-dealers. Since these regs have been in the works for quite a while, some of these alliances may well be in the works too. Others are likely to develop in the coming months as the digital and traditional incumbents feel their way around the new regulatory edifice. (At 600 pages plus, there’s a lot to take in.)
In the healthcare innovation space, I look forward to seeing whether this new pathway for funding launches viable companies. A few have made the leap from crowdfunding to VC funding (uBiome and Scanadu come to mind), and it seems to me that this approach to funding will level the playing field further between startups offering shiny objects in return for the crowdfunding contribution (e.g., Scanadu) and those that are less corporeal in their initial efforts. It remains to be seen whether publicly-available discussion boards will adequately substitute for early stage investor due diligence, and whether the “wisdom of the crowd” will translate to bankable businesses. It also remains to be seen how many businesses really want this pool of investors. Welcoming investors from among the masses isn’t for everyone. Many startups would rather have an investor who can offer some wisdom and connections as well as cash, and many would rather sell a beta product and get feedback on it than sell a piece of the business.
Stay tuned.
David Harlow
The Harlow Group LLC
Health Care Law and Consulting
Image by Georgy Porgy via Flickr CC
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