Regulation Crowdfunding is Not The Crowdfunding of Yesterday

Regulation crowdfunding (or equity crowdfunding as it is casually referred to) is a newish animal on the block, and most people naturally, albeit incorrectly, reflect on their knowledge of “crowdfunding” upon hearing what the Securities and Exchange Commission calls “Regulation Crowdfunding”. Though the two crowdfundings sound similar, they are different animals in terms of what people engaging companies through intermediary platforms get for the money.

The short answer is: Crowdfunding is about creating a space where companies can sell products to consumers who want to consume that product, sometimes while the product is still being developed; Equity crowdfunding funds a company and you get… wait for it… shares or stock of some kind.

You’ve seen what is commonly referred to as “crowdfunding” at platforms like IndieGoGo and Kickstarter. These platforms allow people to drive businesses from early ideas to a finished product and give early funders cheaper access to something new usually at a discounted price. The companies try to create a consumer culture and brand-advocates around their product, and those early adopters get to be first on their block with a new thing. Rewards are usually tiered: For example, for $1 the company says thanks, for $25 they send you a keychain and a t-shirt with their brand on it, and for $475 they might send you a product from their first production run with the keychain, the t-shirt, and the thanks. The funder’s return is limited to a specific perk, with no further upside. And there are obvious risks for consumers investing in an idea-phase company. Most crowdfunding revolves around bringing a product to market.

These projects that are not regulation crowdfunding may be just a back-of-the-napkin sketch of an idea, to a fully developed prototype that they want to market, or the actual product that they’ll be selling. Crowdfundersper sedon’t get investment in the company: they get to be an early adapter of a new thing: a new game, a record, coffee table book, an electric bike, a smartwatch, and the like. They may get it at a deep discount depending on how far the company has to go to develop the product.

Though it may go by any number of phrases– Regulation Crowdfunding (equity crowdfunding) provides capital markets securities instruments. You’re not buying a product: You’re part of the company. A bona fide, legit investor.

Because of that investors should be aware of what stage the company is in, for example… (loosely borrowed from Jeffrey Bolden and Ian McGrady’s “Project Shaping”, and also Lawrence M. Miller’sBarbarians to Bureaucrats, with thanks)

1. Idea phase – are they trying to nail down their idea into a single functional version of the product and they make money giving some part of the company away for much-needed cash

2. Product phase – have achieved making the product and are trying to sell it

3. Products phase – having learned how to make and sell one product to a consumer base, they now attempt to make other products to sell to that base while attracting new customers

4. Administration phase – they make money by becoming more efficient at making and selling their products

5. Selling off phase – they have so many great assets to sell they are going to jettison some products to increase their bottom line in one year so they look great on paper, but usually, they’ve stopped innovating at this point so they enter.

6. End Game – everyone just goes to work waiting for the final nail in the coffin living off the fat of the land until the hammer drops and everyone has to go home.You’ll want to identify what stage the company you’re investing in. For example: they may have a great video that features stunning technology, with experts and amazing theories and depictions of what could be without an actual product on the table. That’s an Idea-phase company. If they can actually show you a product and its price that they can start selling, that’s a Product-phase company. If they have different applications of that one thing, that’s a Products-phase company. If they say they’ve been making these things for years and investment helps them make profits from efficiency, that’s an Administration-phase company. If they want you to invest while they’re selling off assets that’s a Selling-off phase company. And if they want you to invest after they’ve sold off all their assets and are just going around asking for money that’s an End Game company.

So naturally, investors might find the first 4 or 5 phases attractive options. Each would have its own relative risks and rewards.

Companies would seek Regulation Crowdfunding for a lot of reasons. An Idea Phase company may say their idea is a bit cerebral and the financial industry doesn’t really understand it, but engaged intellects sitting at home could easily see this could work well if they had enough money to develop their research into a product, so they would share in the potential upside if the product takes off.

A Product phase company should be able to tell you they know who their customer is, and why they need it, and why they can afford it at their price, and how many potential customers there are out there. They’d use your regulation crowdfunding investment for marketing to grow their customer base.

A Products phase company would be able to tell you they have a customer base that they sell to, and there are related customers they haven’t reached yet because they need to create variations of their product to reach them. They could have a huge pipeline of projects in development that they already know who to sell to. They might use your regulation crowdfunding capital to deploy into the pipeline and readilyfulfilldemand they are aware of.

An Administrative phase would be they’ve basically shown up as fully in the market as possible, and they keep pumping out the hits to their customers, and now they need to make profits from a) efficient administration and b) incubating new, low-cost, low-risk projects that can bloom into a new product and products.

Companies that shuttle between the competent administration and new products are ones that can grow almost infinitely.

Obviously, Selling off assets can earn a company money as well. As long as the shareholders are rewarded and the money goes back into the creative development of new products that can find an audience, the company can have a large cash reserve and grow in new directions.

But if they sell off their assets without rolling over investment into new products, they may be entering a final phase of corporate lifecycle (which could go on for a very long time, but failure to innovate can cost a company its future).

Investors should be keen to identify what phase a company is in by firstly seeing whether they are enthused by whatever their proposition is. Then after the initial blush has passed, they should objectively evaluate what phase the company is in, and how realistic their proposition is in the most real sense of the word: how. real. is this. You can engage companies on intermediary platforms such as WeFunder or StartEngine, and pose your questions. That’s important because probably a lot of other people will have the same questions on their mind as they go through the offerings.

You’ll want to make sure they give you a satisfactory answer. This is where the rubber meets the road: where you learn if they have competent, insightful management that cares about customer concerns or not.

Companies may also seek regulation crowdfunding because it’s just cheaper money and they’d rather have investors control that part of the company than banks. They can give consumers incentives like larger annual returns and dividends in addition to additionalSAFTagreementswhich are basically unpriced access to blockchain tokens at the same time you buy access to conventional security instruments like stock.

StartEngine recently had anICO summit and featuresSun Fund.

Regulation Crowdfunding is investor and securities-based, not consumer and idea- or product-based, angling investors towards sharing in rights conventionally conveyed by securities instead of merely shopping for bleeding-edge (or vaporware) tech at discount prices. In Regulated Crowdfunding, the SEC regulates and limits the investor and the company, and communicates regularly with the public about progressively tighter rules around activities associated with it. The platforms that people engage companies on in this context must be registered with the SEC and be a member of the Financial Industry Regulatory Authority (FINRA), among other things.

Companies approach regulation crowdfunding platforms like StartEnginefor many reasons. Those might include needing early capital in order to fund an expensive development process of a complex idea, or they may be succeeding with off-the-shelf technology but have a proven business model, experienced management, a fat pipeline of shovel-ready deals and might simply prefer to participate in “fintechdisintermediation“, where instead of going to banks or other investment venues where they are treatedlike Shark Tank treats startups, surrendering chunky equity in exchange for assuming the larger risks and rewards of navigating a company’ssalad days. So just because a company may have aTitleIII offering doesn’t mean that their business model or management isn’t proven: It may mean they really want people to participate in adopting new ideas even around conventional technology and rewarding them for it.

Regulation crowdfunding and crowdfunding may sound related, but just like any gathering of relatives over any holiday season, their differences can become readily apparent when sitting next to each other at the table.