- A new law lets private companies raise money in “mini-IPOs.”
- Over 100 mini-IPOs have been completed, raising a total of $1.3 billion.
- Mini-IPOs give startups some distinct advantages.
Ten years ago, a software startup founder named Mike Walsh had a 15-minute meeting that would change his life forever.
The man he met with, Ryan Graves, was a friend of one of Walsh’s employees. Graves was looking for advice on whether or not he should join a new startup called UberCab.
When Walsh heard of this new company, he immediately saw the potential for a taxi platform to improve on existing car services. After all, he said, you “wait 45 minutes for a taxi and then they cancel on you.”
Not only did Walsh encourage Graves to take the job, but he also agreed to invest $10,000 in this new taxi startup.
As Walsh put it in a recent interview, he figured the “worst-case scenario” for UberCab was that “somebody would buy this thing.”
Earlier this year, Walsh’s wildest dreams came true: The taxi startup now called Uber went public at an $82 billion valuation.
Walsh’s investment in the startup became one of the best investments in venture capital history. His $10,000 investment was worth over $100 million in less than a decade.
A decade ago, the biggest venture deals on the planet, such as Uber, Lyft and Slack, were only available to Silicon Valley insiders.
But a recent change in regulations now allows everyday investors to get in on the ground floor on some of today’s hottest tech deals.
The Free Market Is Now Really Free
In America, we love the free market.
We believe that everyone should be able to achieve the American dream without the government standing in the way.
For the past few decades, however, regulations prevented investors from accessing the most lucrative deals. Early-stage investments in Silicon Valley unicorns such as Uber, Lyft and Slack were only open to insiders and the 1%.
That’s because government regulations only permitted so-called “qualified investors” to buy a stake in these unregistered startups. Everyday Americans were shut out from the biggest names in tech, such as Facebook, Uber and Twitter.
In the United States, there are some prerequisites for getting in on unregistered securities. These are defined in Rule 501 of Regulation D of the U.S. Securities and Exchange Commission (SEC):
- A net worth of at least $1 million, excluding the value of one’s primary residence.
- Or, income of at least $200,000 each year for the last two years (or $300,000 combined income if married).
- And, have the expectation to make the same amount this year.
I’ve never quite understood why the SEC allowed only people with considerable means to invest in startups.
Yes, they are risky. For every grand slam in companies such as Uber, there are thousands of startups that turn into financial black holes. Most of these lottery-ticket investments end up in total financial ruin.
But just because you have money does not make you less likely to lose it. The world is full of financially illiterate millionaires.
Nearly 80% of NFL players go bankrupt within two years of retirement. Perhaps we should also ban pro athletes from making risky early-stage bets.
The Rules of the Game Have Changed
Under President Barack Obama’s 2012 JOBS Act, the world of early-stage investments is now open to everyone.
In 2015, the new “Regulation A+” law went into effect, allowing private-stage growth companies to raise money from all Americans in “mini-IPOs.”
The new Regulation A+ rules pertain to fundraises between $3 million and $50 million. This allows private companies to reward early adopters who take a financial stake in their companies.
From June 2015 through September 2018, 123 mini-IPOs were completed, raising a total of $1.3 billion. That’s an average $10 million deal size.
What’s even more interesting is that the space is quickly growing.
The $688 million raised in the third year of the new Regulation A+ rules was more than the first two years combined.
The numbers for 2019 haven’t been totaled yet, but this year is looking even bigger.
In just the past week, crypto startup Blockstack raised $28 million, selling digital tokens to build a decentralized internet.
That was followed by SEC approval for Props, where $70 million worth of tokens has already been bought.
Social media users earn Props by creating and watching video content online. They can then spend their tokens to unlock bonus features in apps and get discounts on in-app purchases.
There are some distinct advantages for startups who raise early-stage capital from early adopters.
- It aligns their financial interests, allowing users to share in their financial success. This incentivizes users to become evangelists, and helps market the product.
- A startup can retain more control of the company and avoid the rigorous ownership demands of large institutional owners. This can also include giving up lucrative board seats to venture capitalists.
- Money can be raised more quickly and efficiently. New “testing the waters” campaigns allows early-stage companies to solicit interest from potential investors before agreeing to a sale.
These benefits make it likely that more companies will forgo the traditional route of raising venture capital and sell directly to the public.
I will be closely monitoring this space in the future.
I don’t know if I’ll find the next Uber to invest in, but perhaps there’s a virtual reality version that’s the next big thing.
Editor, Automatic Fortunes