This is a guest post by Kiran Lingam, a corporate and securities lawyer and regular writer and speaker on crowdfunding and the JOBS Act.

With crowdfunding, an angel investor with a good reputation could now have 10-20x more buying power.  Imagine that a prominent angel investor (a Super Angel) that you follow and admire (e.g. Sig Mosley, Charlie O’Donnell, Stephen Flemming) puts $50,000 of their own money into a young startup.  Personally, I would be happy to put down a small amount alongside them without any significant research or due diligence and I expect that many of their followers feel the same way.

Here are some potential results of this dynamic:

  • A Super Angel, with a relatively small commitment like $50,000, would now have the ability to bring up to $1M of additional funds in through crowdfunding.
  • The Super Angel would have much better bargaining position, and may be able to leverage benefits previously unavailable to angels (e.g. board seats, Series A style protections, protective provisions, higher valuation).
  • Individual crowdfunders would be relieved of fraud worries, due diligence efforts, and transaction term negotiation.
  • Super Angels will be measured on their performance, similar to how fund managers are measured today.  Those with the best performance would attract more crowdfunding co-investment.  Tools may emerge on funding portals or separately to measure angel investor performance.
  • The need for venture capital in the $1-$2 million range may be more limited.  VCs may go later stage or become Super Angels themselves (but see Mark Suster’s post on the signaling problems this creates)
  • Under certain circumstances, the Super Angel may be able to draw certain fees for these services.  We’ll talk about this in an upcoming post.

The extent of the applicability of the above scenarios depends on the SEC’s interpretation of JOBS Act, Section 302(b), amending the Securities Act of 1933 by adding Section 4A(g) stating that “Nothing in this section or section 4(6) shall be construed as preventing an issuer from raising capital through methods not described under Section 4(6).”

This language may mean that a Reg D offering and a crowdfunding offering could occur simultaneously and without integration, but we’ll need clarification on this from the SEC.  If this turns out to be the case, then we’ll also need to understand how general solicitation under Reg D is treated while there is a simultaneous crowdfunding offering (advertising is prohibited for crowdfunding and crowdfunders may see the advertising of the Reg D offering to accrediteds).

At a minimum a Super Angel could use crowdfunding to fill out a $1 million total round using solely the crowdfunding exemption.

What else? What other effects on angel investing do you foresee as a result of crowdfunding?


 

The information on this blog is not a substitute for professional legal advice. The opinions expressed herein are the solely the opinions of the author and not of any law firm, employer or organization affiliated with the author. Nothing in this blog shall create an attorney-client relationship, nor is it a solicitation to offer legal advice. If you ignore this warning and convey confidential information in a private message or comment, there is no duty to keep that information confidential or forego representation adverse to your interests. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your rights.

This post was written by ryanfeit on September 15, 2016

Equity Crowdfunding and the Rise of the Super Angel


Top