It may happen in careful, tiptoeing steps, but a local equity crowdfunding platform is maturing.
On Wednesday, New York-based Return on Change revealed that a cleantech startup, Geostellar, used its website to close a $1 million round. It is the first company using Return on Change to break seven figures in one campaign, giving some credence, Return on Change CEO and founder Sang Lee says, to equity crowdfunding as a way for sophisticated startups and investors to do deals.
“This is definitely going to change the reach, as well as the power, of startups for raising capital,” he says.
Unlike crowdfunding sites such as Indiegogo or Kickstarter, Return on Change is limited to accredited investors—people who meet the income thresholds in SEC regulations governing private company investment. Such investors get a stake in the startups rather than early access to products being developed, which is the norm for general crowdfunding.
Return on Change works with startups that operate in five sectors, each of which touches on sustainability in some way: cleantech, edtech, life sciences, social enterprises, and technology.
“Whether it’s about society or environment, every business has its own flavor on how they intend to promote sustainability,” Lee says.
Geostellar, based in Washington, DC, is an online marketplace for financing and installing solar panels on rooftops. The funding round for the startup, Lee says, is an important milestone for Return on Change.
Initially, Geostellar sought to raise about $500,000, but increased the ceiling on the campaign—and it seems the company is not done yet. “We’ve been engaged with them for a follow-on transaction which we’ll be announcing shortly. They’ll be going for a much larger round,” Lee says.
The successful campaign by Geostellar, Lee says, could help squash the myth that only lower-quality companies turn to equity crowdfunding to raise money. “We’re seeing very established entrepreneurs who have been backed by prominent investors use platforms like ours,” he says. For example, Geostellar previously raised almost $14 million in 2012 in a round that included energy utility NRG Energy.
But even with Geostellar’s successful fundraising, this path to capital is something of a moving target. The rules governing equity crowdfunding have yet to be solidified under the Jumpstart Our Business Startups (JOBS) Act, which Lee says makes some folks wary about participating. That has not stopped Return on Change, and others such as Crowdfunder, from forging ahead.
“There is a little bit of uncertainty about what the final, final version of the regulations will look like,” Lee says. “We haven’t heard anything more onerous than what we have right now that is anticipated to come out.”
Erring on the side of caution, Lee says Return on Change can document the communications between the startups and investors, as well as the accreditation process, for future regulatory reference. Furthermore, investors at Return on Change cannot self-represent they are accredited, but must be verified through a third party.
There are two primary ways to measure for accreditation. Under the SEC’s net-income measure, an investor must make more than $200,000 ($300,000 if married) annually for the prior two years and have a reasonable expectation to do so again that year. Using the net-worth test, investors must have assets valued at least $1 million, not including their primary residence.
Many of the investors who use Return on Change, Lee says, have prior experience in angel investing and know the logistics of the process. He also sees new investors taking the plunge. Through equity crowdfunding, Lee believes some old provincial ways of the investing world can be taken down.
“Angel investing was once heavily restricted to specific geographies, such as New York and California,” he says, “because a lot of angel investing only happened in people’s backyards.”
Lee previously was an investment banker who specialized in clean energy deals with BNP Paribas. He founded Return on Change in 2012, in anticipation of the JOBS Act being passed and introducing new regulations. “Unfortunately it took a lot longer than we had anticipated,” he says. So his company prepared by educating startups and investors on how they might use the platform.
The Return on Change website launched last summer, and Lee says he now wants to open up the service to an international audience. He is taking his time on that front, though, because of heftier regulations.
“We’re creating partnerships to allow foreign issuers [the startups] to raise money from the U.S.,” he says, “and we’re also looking at capital going the other way as well.”
