It’s a little strange to write about the American Revolution and investing. But when it comes to marshalling the power of the crowd, the principles the Founding Fathers espoused during the infancy of America reflected, above all else, the power of the many, where everyone gets a vote: i.e., Democracy.
Warren Buffett’s 2018 Activist Investment
The founders figured out that the ideal way to make decisions about our future is a democracy, where the power is taken out of the hands of the few and placed into the hands of everyone. Similarly, for entrepreneurs, crowdfunding is when their story gets voted on not by the few, but by thousands of small investors. That’s nerve-wracking, of course, but also incredibly powerful.
For the team at NowRx, exhilaration is the word I would use. People – small investors – voted with their pocketbooks to change the way the world gets their prescriptions, and to disrupt the age-old pharmacy process. Thanks to an innovative avenue called Reg A+ Equity Crowdfunding, we found a way to bring our creative idea to the people. Three rounds, $10 million (and counting) later this type of funding is providingus with the financial resources we need, and the control we require, to disrupt the Pharmacy Industry.
Reg A+ Equity Crowdfunding is Crowdfunding Made Powerful
Remember when crowdfunding started – around eight years ago with websites like KickStarter?
Right - but that’s not the type of Crowdfunding we are talking about. Crowdfunding, for us, is Reg A+ Equity Crowdfunding – a totally different, and more powerful, option for entrepreneurs. Reg A+ Crowdfunding came into existence on June 19, 2015, under Title IV of the J.O.B.S. Act. Up to that point, there were essentially two kinds of companies, public companies that trade on open stock markets that anyone can invest in, and private companies that only venture capitalists and other wealthy citizens can invest in (“Accredited Investors”). With the creation of the Regulation A+ entity, the SEC created a new type of corporate entity, one that does not trade on a public stock exchange but that any American, can invest in, usually in small increments of as little as $1000 or less.
This was – and is – a big deal.
There are several restrictions and required disclosures with Regulation A+, so that unaccredited investors have some protections. Because of these additional requirements, most Reg A+ offerings are sold through one of the platforms that meet the SEC’s disclosure requirements. In addition, the SEC requires two years of audited financial statements, an “offering memorandum” and a final qualification statement from the SEC. Once a company is qualified as a Regulation A+ company, it can work with companies like SeedInvest.com and others – attracting anyone to invest.
Unlike “KickStarter” platforms, which you can think of as “crowdfunding light,” investment in Reg A+ offerings is often true equity: this is not just pre-funding the development of a widget, but the purchase of actual shares of stock in the company as if you were buying stock from a stock exchange. You get a stock certificate, you get to watch the growth of the company, and you can trade that stock through the platform to another investor – it’s a transferable security! And if the company moves forward with an IPO, investors have an opportunity to reap the kind of returns previously only available to VCs.
Before Regulation A+, people who weren’t accredited investors had no ability to invest in fast-growth, venture-backed start-up companies. No one could invest in Uber until it went public. No one could invest in AirBnB, InstaCart…and the list goes on. They were limited strictly to venture capitalists and other big accredited investors. Every day citizens had no ability to participate.
That’s over with Regulation A+ Equity Crowd Funding companies. For example, anybody can participate in my company – NowRx – or any others on SeedInvest.com and the other Reg A platforms. It’s a completely new world, a revolution(!), that has only just begun!
$100 billion: it’s transformational – and that’s where democracy comes into the picture.
The founding fathers believed in the transformative power of ‘of the people, for the people and by the people’ and revolutionized the existing power structure by harnessing that ‘power of the people’. Now apply the power of the people inherent in democracy to start-up investing. Assuming there’s 100 million working people in the US, if all were to give $1,000 – the untapped potential of Reg A+ Equity Crowdfunding might be in the neighborhood of $100 billion. What’s even more powerful is the message that a large group of small investors can provide in terms of a vote for good ideas and positive, entrepreneurial change. By opening the doors to everyone, rather than only to those in a tightly-knit club of venture capitalists and wealthy investors, Reg A+ Equity Crowdfunding democratizes funding and helps good works and great ideas come to life and thrive
Ultimately, that’s what happened at NowRx. For example, shortly after we launched, I accompanied our driver to deliver one of the first batches of prescriptions. After the second delivery, the customer came down the driveway to the car in her bathrobe…just to meet me and talk about how much she loved the idea of same-day delivery pharmacy – and how it could help simplify her life. In the past there was no way for a “true believer” like her to participate as an investor, but now she could invest in the company and participate in the upside in a company she really believed in and had experienced at its earliest stage.
That story is reflective of our nature to always innovate, problem solve and push the envelope. To not take “no” or “that’s the way we’ve always done it” as an answer. At NowRx, we looked at the way things have been done for 30 years in pharmacy, and then completely re-engineered it from the ground up, and we applied that same philosophy to our funding through Reg A+: sure, there’s been a way to raise cash for the last 40-50 years; but why should the same old venture capitalists in Palo Alto control the startup industry?
Reg A+ crowd funding has turned the process inside out for both entrepreneurs and for investors. And returns can be significant. For example, NowRx Series A investors invested at a share price of $2.00 per share, and the Series B share price is now $3.45 per share, an increase of almost 73% in one year.
Reg A+ Equity Crowdfunding Tips and Advice
The beauty of Reg A+ is in its simplicity – right down to the reason why an entrepreneur might choose it over a VC. And, as simple as the reasons are, they’re compelling and cut right to the chase of why most of us become entrepreneurs:
- Control! Founder maintains decision and vision control by not having to give up board seats and decision-making power.
- More Favorable Terms for valuation and more – the elimination of “gotcha” clauses
- Promotional Power of crowdfunding draws more attention than a quiet round of VC – raising funds becomes part of marketing and communications
The bad side? Reg A+ Equity Crowdfunding can be a challenging process with the SEC. There’s a lot of paperwork, you must get audited financial statements, and you’re going to be scrutinized by the SEC. There are also ongoing reporting requirements with the SEC that are similar – but not as onerous – as public company reporting. On the positive side, investors can feel confident about the company’s financial credibility and ethos. Ultimately, Reg A+ Equity Crowdfunding is a good call if you can deliver on the following points:
- Story! Make sure your value proposition is easy to understand, and your story resonates quickly. Crowdfunding investors tend not to be as sophisticated as venture capitalists and are not going to spend months doing due diligence, nor do they want to. As such, not all companies are ideal fits for equity crowdfunding (Reg A+). For example, the latest biotech company deploying gene therapy, using AI and machine learning, may not be that readily digestible by many non-professional investors. To succeed. the elevator pitch must resonate quickly with a non-professional investor: it can be as simple as asking: are you tired of standing in line waiting for your prescriptions at the pharmacy?
- Traction! We were able to demonstrate traction, in terms of actual paying customers and revenue, right from the get go. This is a huge advantage in crowdfunding. Again, these are not professional investors who may be accustomed to funding “vaporware” or moonshots that have yet to be proven in the real world. Before you head to crowdfunding, make some sales!
- Transparency! Translate your story for the crowd, without pretense, and in a transparent way. I speak to entrepreneurs all the time and have seen the games played between VC and entrepreneur. VCs almost expect it, and entrepreneurs generally play along. In crowdfunding, the games are gone, replaced with stories told simply and honestly. That is part of the ethos of the crowdfunding community at large, and because of it, you and your startup will be better served.
While the power of Reg A+ Equity Crowdfunding to democratize investing is profound, it isn’t always an easier path to funding – for example, SeedInvest accepts less than 1% of the companies that apply to be on their platform. The truth is that some ideas just won’t work well (it took a while for democracy to catch on).
So before you start down the Reg A+ path, be mindful of who you’re attempting to reach; ask yourself if your model is truly showing traction, if your story of change can be told simply, transparently and compelling enough to move your fellow Americans to commit $1,000 or more to the cause. If you can, you will find that Reg A is powerful grassroots crowdfunding for entrepreneurs who believe that what they build can – and will – make a difference to the world, and in turn will give an investment ‘voice’ to the many. Let the revolution live on!