well off enough to participate, but who aren’t part of the professional VC and angel networks that have typically participated in “private placements” of securities under Regulation D 506 (b). The first important change was, not surprisingly, the social and interactive possibilities of Web 2.0.
One prominent outfit taking advantage of those possibilities is San Francisco-based AngelList. Founded in 2010, the well-known networking website allows wealthy individuals recognized as accredited investors to find information about startup securities offerings and form investing syndicates, even if they don’t know an insider like a Silicon Valley VC.
Most startups seeking investors through AngelList are fundraising under Regulation D 506 (b), so they can’t advertise to the public. They post a company profile in a restricted area of the AngelList website that is only accessible to accredited investors.
The second significant change in the fundraising landscape stemmed from the JOBS Act. The SEC raised a cap on the number of investors a private company can have before it’s required to become a publicly traded company. The cap was once reached at 500 investors; it’s now set at 2,000.
“That’s a very big deal,” says Swati Chaturvedi, co-founder and CEO of San Francisco-based Propel(x), one of the online fundraising portals have followed in AngelList’s footsteps.
The higher cap not only allows a larger number of accredited investors to buy a startup’s securities. It may also make it possible for each of those investors to put in an amount lower than the usual minimums demanded by startups when they raise money from investing syndicates. These minimums might be pegged at $25,000 or even more. But with 2,000 investors rather than 500, each could invest more modest sums, and the total amount could still meet the startup’s fundraising goal, Chaturvedi says.
Even though only wealthy people can invest, these rounds look just a bit more like crowdfunding.
Startup investing may now be attractive to people who are comfortably off, but not rich enough to bet as much as $25,000 on a single startup, Chaturvedi says. If they like, these upper middle class investors can now invest in a greater number of startup companies because they can commit smaller amounts of money to each one. A portfolio of 10 or more startups may improve the odds that at least one of the companies backed by an individual will pay off handsomely, she says.
Through Propel(x), investors can put up as little as $3,000 to buy into a fund structured as a limited liability company (LLC) or special purpose vehicle, which in turn buys the securities of a single startup. Other investors able to kick in $25,000 or more can invest directly in the startup’s securities.
Propel(x)’s mission, in addition to broadening the U.S. investor base, is to fund young companies whose products are based on significant scientific discoveries in fields such as engineering, life sciences, and chemicals and materials.
Calling itself “an online angel capital platform,” DreamFunded is another San Francisco-based fundraising service company founded after the passage of the JOBS Act. Founder and CEO Manny Fernandez, an angel investor, says DreamFunded accepts investments of as little as $5,000 from accredited investors, and also groups them into funds that invest in a single startup. DreamFunded makes money on fees and other revenues from the administration of these funds.
Two other recent SEC rule changes also create new avenues for private company fundraising.
Seeking money from the wealthy alone, but advertising to the general public
The SEC has introduced a variation of the Regulation D 506 (b) fundraising rules. True to form, the agency didn’t go crazy looking for a creative name for this variant—it’s called Regulation D 506 (c).
Under this option, a private company can freely
