With Regulation A+ of the JOBS Act going into effect last month and opening the doors for private companies to raise capital from non-accredited investors, it didn’t take long for the new laws to make a splash. Raising over $17 million since launching its crowdfunding campaign on June 19th on the StartEngine platform, Elio Motors has become the largest ever disclosed equity crowdfunding sale. Since surpassing their internal funding goals, Elio has raised their campaign with a current $25 million goal.
What’s interesting about the campaign is that it was run in tandem with the firm also raising money from accredited investors, using Rule 506 of Regulation D, with the firm having greater success with StartEngine. As such, the success can be considered to legitimize the potential of raising money from private investors. To learn more about the record campaign and how Elio Motors achieved its success, Finance Magnates connected with StartEngine’s partner Ron Miller.
Secret Sauce of Equity Crowdfunding
Asked what Elio did right, Miller explained that the firm was successful in marketing its crowdfunding campaign to “create a really powerful marketing theme and mission.” This included creating lots of content, such as through collaborating with YouTube celebrities who test drove the car. In addition, with scores of customers having placed orders for the $6,800 car, Elio has a sizable community to market the crowdfunding campaign to.
Overall, Elio Motors had the ingredients for what Miller believed necessary to successfully meet goals on a crowdfunding campaign. According to Miller, there are three main requirements that firms should keep in mind before launching a campaign. Firstly, Miller stated that a company should “have a validated concept and product traction,” adding that it shouldn’t “just be a few kids and an idea.” Secondly, an established management team in place is needed that can execute the product mission. Thirdly, firms should have an established community to market to, or at least have the ability to create one.
Miller explained that these requirements are similar to expectations startups face when they approach investors for a late-stage or A-round funding. The requirement to be beyond the idea stage before soliciting capital from non-accredited investors is also partially due to the expenses involved. According to Miller, due to disclosure requirements of complying with Regulation A+, startups should expect to incur legal and accounting expenses of around $50,000 to $65,000.
While the costs may be considered restrictive to smaller startups there is an advantage to them for investors. The expenses incurred by startups could be considered a filter that will naturally remove less serious firms and more importantly scammers from launching crowdfunding campaigns.
Coming Secondary Market
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Where crowdfunding is expected to become really interesting is when a secondary market forms. Currently, one of the risks is a lack of liquidity for investors to exit their positions. As such, with limited opportunities to sell shares in private firms, crowdfunding investments are more or less locked up until a liquidity event or profits distribution take place.
StartEngine’s Ron Miller was bullish that we will soon see secondary marketplaces forming
A potential solution is the creation of secondary marketplaces where startup shares could be freely trade. In this regard, StartEngine’s Ron Miller was bullish that we will soon see such marketplaces forming. Specifically, Miller mentioned that an advantage of the Regulation A+ rules is that they allow for the immediate sale of shares. This contrasts with other forms of sales to private investors such as those that comply with Rule 506 of Regulation D.
As a result, Miller pointed out that momentum for the formation of secondary markets is taking place, with the topic currently being discussed at government level. In addition, OTC Markets, an operator of an electronic platform for OTC securities, has also been developing infrastructure for crowdfunded shares and presenting investor webinars about the subject.
Platform and Startup Relationship
In the long run, Miller expressed that crowdfunding platforms can be viewed as creating a turnkey solution for startups to raise capital. In this regard, campaigns are a “partnership between companies and platform,” and that’s what makes it work. To assist startups in making the fundraising procedure, many crowdfunding platforms also provide additional services related to the campaign. This can include in-house groups or referrals to outside marketing, legal and accounting firms. The best platforms also contain large investor communities for the actual fundraising.
In terms of StartEngine, Miller expressed that his firm believes one of their key advantages is that the company’s founders have backgrounds as entrepreneurs themselves which helps them understand the needs of startups. In addition, the firm has quickly developed a track record of successful campaigns allowing them to attract a growing community of investors. According to Miller, StartEngine has a strong group of firms in their pipeline and are in dialogue with about 15 other companies.
Fintech Spotlight is a new column on Finance Magnates devoted to reviewing innovative financial technology companies and sector trends.