August 24, 2014
Last week, I shared how the crowdfunding business has evolved from a donation-based model that has been largely taken over by business users who found that the donation-based crowdfunding rules provided a great way to skirt the commerce and securities rules. But one company did such a good job that they may have poisoned the well for everyone.
In 2013, a company called Oculus invented some kind of video goggles. They were very unique, they were 3-D, virtual reality, and had all sorts of other bells and whistles, and they told the gaming community that for a $250 donation, they would get a pair of these glasses once they were invented. They were completely straightforward and they told the donors exactly what would happen – when the product was ready to go to market.
Everybody did exactly what they were supposed to do, everything was working beautifully. In fact, it was working so beautifully and Oculus was receiving so many orders for these glasses on a donation basis, that Facebook got wind of what was going on.
Facebook then calls Oculus and asks, “what’s happening, we see you’ve invented some interesting glasses and we’d like to know more.” Facebook ends up purchasing the company for $2B. The donors had no expectation to participate based on their contributions, above and beyond receiving a pair of the glasses once they were invented. But now, they’ll probably never be invented and the donors will either get their money back or they’ll get something of comparable value. But had the donors actually been investors, they then would’ve received something like $40,000 per share, for every $250 that they would have “invested” instead of donated. For this reason, some people have become very unhappy with the crowdfunding model on a donation basis.
Something similar was announced this week. It was just two years ago when home-automation company SmartThings began life as a Kickstarter Project. With an initial goal of $250,000, it raised $1,209,423 from 5,694 backers. The company then raised an additional $15.5 million in venture capital, including a $12.5 million Series A round of funding. On August 14, 2014 Samsung scooped it up for a reported $200 million dollars. How do you think those donors feel?
Not related, but concurrently, the Congress of the United States passed legislation making a new kind of crowdfunding legal for the first time in United States history. From now forward, securities-based crowdfunding would become legal. That means that regular people, meaning people who are not accredited, (i.e. people who are not high income earners or millionaires) would have access to opportunities that are not public on the stock market but rather, in the incubation stage.
Rather than making a donation, the crowd can contribute capital in exchange for stock or even a debt instrument. Think about this…
Maybe you know somebody who has invented the next Facebook or the next Twitter or “The Next Home Run”. Going forward, those companies would be able to solicit early stage investment capital from regular people. And regular people can get stock that could potentially explode. (Or not).
Professional investors know that the real money is not made when a company goes public – that is when the game of Musical Chairs begins. The real money is made in the private placement phase – a phase that until now, has been controlled by accredited investors. But not for long.
Legislation known as the Jobs Act became law in 2012 and was enacted by the Securities and Exchange Commission in 2013. It allows for general solicitation of investors if they are accredited, but it also provides for a mechanism for “regular people” to participate too. We are currently waiting for the SEC to layout the regulations.
I will continue to bring more info on this topic because it is potentially the biggest business game changer in 80 years. Keep your eyes on it. This one is BIG.
Filed under Business Financing, Business Growth, Creating Buyers, Film Financing, Financial News, Growth Minute, Guru Marketing, Private Equity, Raising Capital, Real Estate, That's Cool by Joel Block