For more than 80 years, people have wanted to allocate a piece of their portfolio – even just $10k – to a compelling, high-risk/high-reward venture. The problem was, until the JOBS Act was passed a couple of years ago, and the rules were written even more recently, you had to be a venture capitalist or private equity firm to even see those groundfloor deals (that is, unless your cousin hit you up for cash on his new social media startup). The game has changed, and you can now see private deals offered under Regulation D, Rule 506(c) if you are accredited. Companies that qualify for the exemption can now conduct a general solicitation of accredited investors.
The progressive startups will win, and must adjust quickly to take advantage of the new law. If a startup can get their deal in front of the average investor, the chances of winning at completing a fundraise — even faster than a venture capital group could fund the same company — will be very likely. Venture group used to get all the action, and the average investor missed out. Missing out was the norm. But the norm has changed. Groundfloor level positions used to be exclusive to those who were “in the know.” Not anymore. The average investor is now at par with the big boys.
Some startups to avoid are those that do not offer risk mitigation. If a startup offers risk mitigation, the chances of private ‘untapped’ investors underwriting the fundraise increase dramatically!
Company after company are now launching their private fundraise to support their growth using Rule 506(c). Unique deal structures are, therefore, being demanded. Unique deal structures, for example, that provide a “wait and see” option to convert to an equity stake in the company at the investor’s discretion will become more popular. Such structures allow investors to enjoys an interest rate while they wait and see if the startup skyrockets or gets acquired for a premium. And if it doesn’t, well, that’s where the unique structure would apply.
To be clear, startups must provide risk mitigation to investors in order to really stand out in the crowd. Investors want deals that are designed to stand out in the crowd. Effectively, deals that provide a hedge for investors in a best-of-both-worlds scenario: enabling investors to jump into a high-potential tech investment, but without the typical risk exposure. Knowing that there are millions of investors in America, the key for any startup is generating traffic and being able to quickly monetize it. This means that online gateways are needed that:
· qualifies prospective investors,
· provides complete disclosures of the offering to investors,
· issues serialized offering documents to investors,
· provides for investors to complete subscription documents, and
· accepts investment transactions.
In an era where private capitalization has been unshackled, those who ‘know how’ to take advantage of the new law can help blaze a trail for compliant general solicitations. But without an online gateway, it’s impossible!
The future is now – and for those previously blocked investors from deal flow, there simply isn’t a smarter way to invest. It’s like a modern day gold rush for both sides: investors and fundraisers.