Title III Crowdfunding changes to the JOBS Act have hogged much of the spotlight since the legislation was tentatively approved in September, but Title II Accredited Investor updates are already in place and posting positive results.
The San Diego Venture Group hosted several players in the accredited investor sector for a panel discussion at the Marriot Del Mar on Thursday. Several panel members said the new legislation has already resulted in more investors from more geographic areas.
“We’ve got groups like Tech Coast Angels and other angel groups that do a great job later on, but, being from Iowa, how does someone in Iowa City, Iowa, know what’s going on in Tech Coast Angels in San Diego?” said Ted Roth, president of Roth Capital Partners and its OpenRound portal. “They don’t -- this is going to give them access.”
Roth said the investors they work with at OpenRound are typically people in family offices, high-net-worth individuals, retired executives, and hedge or mutual fund portfolio managers -- people affiliated with the industry who are looking for early-stage opportunities and not exactly sure where to find them.
Roth said they currently deal with about 300 institutional accounts on their portal.
Scott Jordan, founder of HealthiosXchange, agreed that Title II now allows a wider geographic scope of investors to participate, and said there are a total of 2,000 accredited investors on the HealthiosXchange portal.
“Angel groups are asking for $25,000 and they want you to participate -- but I live in Kansas City, I don’t live in San Francisco, right?” Jordan said. “This is what’s so incredible about what’s going on right now with social media and the Jobs Act and 506c -- being able to touch the world.”
With this influx of now-viable investors comes new responsibilities for portals to ensure newcomers understand the risk involved in early-stage companies, as well as the structure of the investment.
“There will be a lot of new people coming in, and I think setting expectations is really where we have to make sure we’re doing all that we can, because it’s not like investing in your 401k where you put it into a public company, and the stock goes down and you say ‘Well, I’ll just take the loss and get out,’” Roth said. “You’re investing in something that is going to take some time for liquidity, and if you don’t go in understanding that, you’re not going to be able to look every day and see what the valuation is, or if you decide you want to buy new car and want to take some money out, you can’t do that because it is liquid.”
As for which companies get listed, Roth and Jordan are taking different approaches. Whereas Jordan wants to list as many companies as possible on his site -- though not all are able to be funded -- OpenRound typically only has four or five funding opportunities available at a time.
Both companies do due diligence to vet the most promising investments. Roth said his portal typically looks at 20 to 30 deals a month before settling on the four to five that are listed.
“We know that our investor base really is looking for something that’s maybe 18 to 24 months from a liquidity event, so we’re looking for something that’s farther along in the development process, and has some kind of revenues or at least a gateway to revenue in a short period of time,” Roth said.
Jordan’s site lists upward of 5,000 companies, only the top quartile of which is able to be funded. This ranking is based on internal metrics, qualitative algorithms and a crowd-sourced component looking at social media, which are combined and form a score that determines which companies are able to be funded.
Jon Carder, founder and CEO of MOGL, said that while venture and angel funding certainly have their benefits, using Roth’s OpenRound for financing was a better later-stage option for MOGL, which had already received funding from three venture capital firms.
He pointed out that some angels and venture capitalists want more control over the company than 40 or 50 crowdfunding investors could have, and often also want you to relocate, which isn’t the case with Title II funding.
This symbiotic relationship was echoed by all the presenters, who said they see Title II investing working alongside angel and venture investment, not taking the place of it.
“I think what potentially could occur in the next couple of years is this becomes a parallel path, existing with bootstrapping and VC,” said Jeff Belk, founder of the new Bright Light Management firm. “So that mindset that it’s not a ‘One goes away and one takes over,’ but you have two parallel paths that you interact with makes sense.”
9645 Scranton Rd. Ste., 110
San Diego, CA 92121