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Starting May 16, Entrepreneurs Can Raise Money in a Whole New Way. Here’s What You Need to Know

Monday, May 16, 2016, will be a very big day in the world of crowdfunding.

More people will be able to invest in entrepreneurs through crowdfunding than they were just the day before. And that means that more entrepreneurs with more innovative ideas will be able to launch more businesses.

“The implications of legalizing equity-based crowdfunding are both significant and far reaching. Crowdfunding has the power to help democratize the capital raising process by giving entrepreneurs, for the first time, direct access to tens of millions of prospective investors,” says Brian Burt, the chair of the emerging business group and the law firm Snell & Wilmer, in an email with Entrepreneur. “In their search for startup or growth capital, entrepreneurs will no longer be constrained by the size of their personal Rolodex or the absence of pre-existing relationships with angel groups and venture capital funds.”

So what’s changing?
In April 2012, President Barack Obama signed the Jumpstart Our Business Startups Act into law. Called the JOBS Act, the goal of the multi-pronged piece of legislation was to make it easier and faster for small businesses to get access to capital.

The third piece of the JOBS Act, Title 3, opened up equity crowdfunding for unaccredited investors. “For the first time, anyone can become an investor in a business and be able to share in its profits and growth regardless of income, net worth or level of financial sophistication, and this will open up a new source of potential financing for entrepreneurs, which could be a game changer,” says Ellen Grady, an attorney and corporate governance specialist at the law firm Cozen O’Connor, in an email with Entrepreneur.

Prior to this rule change, only accredited investors — an individual whose net worth, or joint net worth with that person’s spouse, exceeds $1 million, as defined by the SEC — were able to invest in startups through equity crowdfunding in the U.S. (For the purposes of this calculation, an individual’s primary residence is not included in the tally of net worth.) Alternatively, an accredited investor is an individual who had income exceeding $200,000 in each of the two most recent years with reasonable expectation of earning just as much in the current year. Both members of a couple are considered accredited investors if they have joint income of more than $300,000 per year with reasonable expectation to earn a similar income in the current year.

The new equity crowdfunding regulations are updating the eight-decade old Securities Act of 1933 and the Securities Exchange Act of 1934. “Companies across the United States, for the first time since 1933, will be able to seek investments from ordinary Americans without having to go through the expense and rigor of a full-public stock offering,” says Richard Swart, the chief strategy officer of the equity crowdfunding event coordinator NextGen Crowdfunding, in an email with Entrepreneur.

In essence, equity crowdfunding was only available to sufficiently wealthy individuals. As of May 16, all individuals will be able to invest through equity crowdfunding.

We’re not talking about tote-bag-for-a-donation Kickstarter-style crowdfunding here. What is equity crowdfunding?
Kickstarter made crowdfunding a nearly household idea. On Kickstarter, artists and entrepreneurs raise money to fund their projects by soliciting donations in exchange for token gifts, experiences or some sort of recognition.

These new rule changes are not dealing with Kickstarter-variety crowdfunding. They are expanding access to equity crowdfunding, wherein an investor gives an entrepreneur cash in exchange for a piece of his or her business.

“Now entrepreneurs can raise money and use it on any part of the business they think will help their business grow, without needing to offer some perk or commit to giving a pre-order for a product,” says Aaron McDaniel, the CEO of Access Investors Network, mobile aggregator of hundreds of equity crowdfunding deals, in an email with Entrepreneur.

The new rules also open the door for a new variety of crowdfunding platforms.

“These portals will be similar to Kickstarter — companies will post videos and information about their offerings, and if you like what you see, you can invest,” say Jeff Annison and Paul Scanlan, co-founders of Legion M, an equity crowdfunding studio for the entertainment industry, in an email with Entrepreneur. “The difference is that while Kickstarter is strictly rewards based (i.e. your money is essentially a donation in exchange for a reward or a pre-sale version of the product), the companies on these new platforms will be selling equity or debt financing. If these companies are successful, you stand to make money.”

OK, that’s cool. But why does it matter?
Most crucially, expanding access to crowdfunding will expand the amount of money being invested in startups.

“This means more capital for entrepreneurs. While the number of startups will stay the same, the amount of money available to deploy into this asset class will grow. Therefore, the rule change will have a profound shift on the early-stage investment industry and the economy as a whole,” says Shelly Hod Moyal, a co-founder of angel investment network iAngels, in an email with Entrepreneur.

Entrepreneurs will be able to raise more money in a shorter period of time, especially those running startups that can grab the curiosity of everyday investors online, says Hod Moyal. “Title III will shorten the time and expand the scope of fundraising cycles, especially for B2C companies that can easily convey their value proposition if they create compelling digital media to support their company’s narrative, and distribute that media effectively through relevant platforms.”

Taken together, equity crowdfunding from unaccredited investors could bring a couple of billion dollars of additional capital into startups each year in the U.S., once the industry has a chance to grow into and adjust to the new regulations, says Mat Dellorso, the co-founder and CEO of private placement technology company WealthForge, in an email with Entrepreneur.

In addition to making more money available to entrepreneurs, the new equity crowdfunding rules will make more capital available to a wider range of entrepreneurs. Venture capital and angel investor dollars tend to flow to companies based in Silicon Valley and New York City, skipping over entrepreneurs across the country, points out Swart.

“Venture capitalists and angel investors focus on companies with home-run potential. You might have a great little profitable company with dedicated customers, but if you don’t have the potential for a billion-dollar IPO or acquisition, a VC or angel isn’t likely to be interested. That said, your community of customers might be very receptive to investing,” say Annison and Scanlan of Legion M. “The same goes for companies built around a social cause. Large investors are very focused on optimizing the bottom line. Smaller investors may be fine with a lower financial return if they also feel like they are having a positive impact on the world.”

Your grandmother, sister and friend’s brother invest for different reasons than venture capitalists. And that’s great. That will increase the diversity of the kinds of entrepreneurs who get capital investments to build their businesses.

“It’s pretty cool that for the first time in 80 plus years, normal people will be able to invest as little as $100 in a startup or small business that they love,” says Nick Tommarello, co-founder and CEO of the equity crowdfunding platform Wefunder, in an email with Entrepreneur. “You’ll know that whenever you walk into that cafe, you helped make it happen.”

Crowdfunding Site iAngels Raises $14M for Israeli Startups

Israel is a hotbed for tech startups, but it is also a tight knit community where a small number of local investors have access to the best deals.

Enter  iAngels Crowd Ltd., an investing network founded by Mor Assia and Shelly Hod Moyal, two women who have taken their knowledge of Israel and their international business experience and combined it with a crowdfunding model that matches international investors with Israeli startups backed by top Israeli investors.

The firm has now raised a $14 million Series B round led by Australia-based Thorney Investment Group to expand.

“The biggest advantage of investing with these [local] angels and VCs is the fact that they have the best access,” Ms. Assia said. “When an entrepreneur in Israel wants to do a startup, these are the first people he calls, and they’re the first people we called when we wanted to start iAngels.”

Before they started iAngels, Ms. Assia worked as a product developer and consultant at SAP Labs, IBM Global Business Services and Amdocs, while Ms. Hod Moyal worked as an associate at Goldman Sachs Investment Bank. They said they learned at these companies what business standards international investors expect.

iAngels does data-driven due diligence on startups–something that angel investors may have a hard time doing either because they lack resources or are used to investing by gut feel, the founders said–and builds relationships with investors. Another goal is to help the startups expand beyond Israel into international markets, which they have to do if they’re going to continue to grow.

For startups that qualify, the firm co-invests with well-known investors in Israel and then offers the deal to a global audience of accredited investors on the same terms. It has also offered investments through NFX Guild, which specializes in building digital networks and marketplace startups from its offices in Israel and Silicon Valley, although iAngels invests in a wider variety of startups than NFX.

 

This article was originally published on The Wall Street Journal

Crowdfunding in the Context of Portfolio Management

iAngels’ Founding Partner, Shelly Hod Moyal, recently published a white paper that explains how crowdfunding fits into the context of portfolio management.  Below is the introduction of the piece.  You can download the full version here
 
With interest rates at zero and the introduction of crowdfunding-based financial innovations, investors are seeking both alpha and diversification in a new class of alternative assets: start-ups, consumer loans, private equities, and real estate projects.
While investors have deployed capital into venture capital and private equity funds, credit funds, and REITs for quite some time, “alternative alternatives” or “A2 “, represent the possibility of investing in specific securities within each of these alternative asset classes. Just like the public invests in and lends to public companies through individual stocks and bonds — not just mutual funds, the investing public can now invest in and lend to private companies and individuals through crowdfunding.
Yet, although start-up investments have a low correlation with traditional assets and can complement an investment portfolio, start-up investing is not suitable for all investors. Due to their small size, start-up investments are both illiquid and highly volatile. (For more on whether start-up investing is right for you click here).

This white paper discusses the risk/return profile of A2 with respect to diversification, a changing investment landscape, strategic asset allocation, and the prospects of A2 investing – specifically start-ups– as part of a broader investment strategy.

iAngels Becomes First Equity Crowdfunding Platform to Create Early Liquidity for Employee Stock Options

We are happy to announce our most recent offering: secondary sales, and are proud to be the first crowdfunding platform to offer such opportunities.

Providing liquidity for employee owned shares will give our investor community the unique opportunity to invest in later stage startups while simultaneously allowing us to help solve an issue in the startup ecosystem – the liquidity of employee owned shares.

Learn more about our newest feature in the articles below

Finance Magnates

CrowdFundInsider

MarketWatch

Should You Invest in Alternative Alternatives?

With interest rates at zero and the introduction of crowdfunding-based financial innovations, investors are seeking both alpha and diversification in alternative assets: start-ups, consumer loans, private equity, and real estate projects.

While investors have deployed capital into venture capital and private equity funds, credit funds, and REITs for quite some time, “alternative alternatives” or “A2”, represent the possibility of investing in specific securities within each of these alternative asset classes. Just like the public invests in and lends to public companies through individual stocks and bonds — not just mutual funds, the investing public can now invest in and lend to private companies and individuals through crowdfunding.

Alternatives Went Mainstream, A2 to Follow

Once considered an investment vehicle only for sophisticated, high-net-worth individual investors, alternatives — real estate, private equity funds, hedge funds, managed futures, commodities, and venture capital — have become a standard component of almost every professionally-managed investment portfolio, growing twice as fast as non-alternatives since 2005.

 

Click here for the full article

iAngels on the Dealflow.com Blog

I got word of all the Citizen.vc activity when I was in Tel Aviv, meeting with Mor Assia, the sharp 33 year old founder of Israel-based iAngels. When our conversation turned to how everyone in the industry wants to see faster — and let’s be honest, more liberal — regulatory action, Mor seemed a lot more optimistic than yours truly. I told her, “When the Tinder generation is in power, we’ll see faster progress. In the meantime, let’s just be thankful for whatever guidance we get.

 

Read the full article here

Fund Forward: 8 Exciting Trends in Crowdfunding That Are Coming Sooner Than You Think

With a compound annual growth rate of 88% since 2011, crowdfunding, particularly equity crowdfunding, is taking off. The decentralization of finance gives individuals more choice and control as to where they invest their money, and simultaneously offers startups access to new sources of capital.

So what does the future of crowdfunding hold for us?

 

Click here for the full article

Israeli Crowdfunding Platform iAngels Brings Forth Blessings of Biblical Prophecy

Equity crowdfunding platform, iAngels, has come up with a way to give global investors access to investing within the Startup Nation.

By partnering with lead angel investors and technology startups in a variety of fields in Israel and promoting them to top tier investors across the globe, iAngels gives accredited investors the opportunity to become angels in their own right by investing in technology startups alongside top tier angel investors in Israel. The investing match-up gives the would be investor abroad the comfort they need while ensuring that iAngels does the due diligence alongside the local investors about the company.

Click here for the full article