This week, at SVForum’s East Bay Series, Mark Perlmutter, founder of MicroAngels and an expert in using Direct Public Offerings as a funding mechanism for startups, outlined a fundraising model that sits at the intersection of crowdsourcing and social media.
Perlmutter explained that existing California law that allows companies to publicly sell shares, without an underwriter, to “accredited lite” investors, amounts to a crowdsourcing mechanism that has already been in place for years.
His strategy relies on one of two Direct Public Offering (DPO) mechanisms, the Small Corporate Offering Registration (SCOR) exemption, and the so-called California 25102(n) exemption, which allow a company to raise as much as $1 million or $5 million, respectively, by selling shares directly to investors.
Both approaches allow limited public advertising of the offering, but Perlmutter pulls social media in, and this is where it gets interesting.
Perlmutter advises companies that plan a DPO to aggressively build a large social media following, and provide regular updates on corporate progress and milestone completion. Doing so, he says, builds confidence among fans in the company’s ability to meet projections and hit targets, and belief in the potential for the company to ultimately file a traditional Initial Public Offering.
These loyal fans, then, are potential respondents to a public advertisement for a DPO. Under a California 25102(n) offering, potential investors still need to be qualified, but only to a lower hurdle of $250,000 in minimum net worth, excluding residence, and gross income in excess of $100,000. The first offering would be limited to investors within a single state, say, California.
Some of the funds from the first DPO can be used to set the stage for a second DPO, open to investors in multiple states. (It will cost more to prepare for the second, nationwide, DPO.) Companies should keep track, however, of the investors who didn’t qualify the first time because they were out of state – they may be able to invest now in the second, broader, DPO.
At the same time, the company needs to keep hitting growth milestones, and growing its social media fan base. These are key to a successful follow-on offering.
The second DPO, registered with the Securities and Exchange Commission, and offered nationwide, can be advertised on social media, and other online channels. This is where your loyal fan base comes in – all of your fans can now invest, and they can make your offering go viral with their “likes” and retweets.
Perlmutter advises companies to sponsor an online summit or webinar about its industry, to educate fans and potential investors. He says that to raise $10,000,000 in a nationwide DPO, you need to think about 1,000 online friends each investing $10,000. If your take rate is 10%, that means you need 10,000 fans.
As always, communications is key with investors – companies have to be clear up front that while investors may acquire shares in the company through these two public offerings, there is not yet a public market for the shares. That won’t come until the IPO. Company’s following this two-step DPO route must continually remind investors of this fact. (Hint: leverage social media and your big fan base.)
Online crowdsourcing for startups is available today, assuming strict adherence to the rules. Social media is helping to make it possible.