Chat with Mat Dellorso (CEO of Wealthforge) discussing Title III of the JOBS Act

Jay Farber [2:01 PM]
Hi all! Welcome to the next installment of the ThinkTank.vc FinTech chat. Today we’ll be discussing Title III of the JOBS Act, with Mat Dellorso (CEO of Wealthforge) here to join. If you haven’t read up, here’s a quick primer on the subject: http://fortune.com/2016/05/16/title-iii-jobs-act/
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[2:02]
@mdellorso: mind sharing a few opening thoughts on what you’ve seen so far in the couple weeks since it went into place?

Mat Dellorso [2:02 PM]
joined fintech by invitation from @jayfarber

Mat Dellorso [2:04 PM]
Yes glad to thank you. So on May 16th after 4 long years of rule making the SEC promulgated Title III aka crowdfunding rules allowing small businesses and startups to raise up to $1M from “the crowd” allowing non-accredited investors the ability to invest in startups and private companies for the first time

[2:04]
is everyone aware of the rules and regulations or are their questions about that?

Jay Farber [2:05 PM]
I think we have the high-level view (though certainly in less detail than you). Maybe worth sharing what you’ve seen so far in terms of platforms starting to take advantage of it?

Mat Dellorso [2:06 PM]
Some thoughts that we have at WealthForge, in being active participants in online capital formation over the past 6 years are that the new regulations are restrictive and probably only advantageous to certain types of businesses such as consumer products companies, or those around an affinity or location so that the community would invest in it.

Josef Feldman [2:06 PM]
I’m curious what the general opinion is about the types of companies / projects that will most benefit from crowdfunding. People I’ve spoken to generally think there’ll be a severe adverse selection problem (esp for companies that can obtain traditional venture financing)

Mat Dellorso [2:08 PM]
I believe for the vast majority of offerings there may be an adverse selection problem as yes in many scenarios VC funding or a large investment strategic partner could be a better investment option for the best companies that can receive it. However, we have seen several scenarios where a company could benefit from many investors, to spread the word, such as in the previous case of Oculus or Pebble benefiting from highly publicized support from many backers or potential investors

[2:09]
The companies that likely utilize title III and have investor interest may not look like VC type investment opportunities and returns, likely the offering would be for a different purpose such as awareness, or like Sam Adams did many years ago to include their customers and supporters in a tranche of the offering

Josef Feldman [2:09 PM]
yes but in those cases they benefit from traditional crowdfunding not necessarily equity crowdfunding

Chad Castro [2:10 PM]
Forgive the 101 question, Mat but investors making <$100,000 per year can invest the greater of $2,000 or 5% of annual income. Investors making >$100,000 per year can invest up to 10% of their annual income — Who’s job to track/verify that — the registered intermediary?

Mat Dellorso [2:10 PM]
Yes equity crowdfunding is brand new, yet many of the backers of Oculus sure would have rather had equity

[2:10]
Chad great questions

[2:11]
Right now I do not believe there is a centralized body that aggregates that information across portals and offerings

[2:11]
It is very much a protection upon investors to guard against themselves

[2:12]
At WealthForge, we have not done any title III offerings as these questions have yet to be sorted out and have yet to have clear regulation on process and practicality

Jay Farber [2:12 PM]
So question to the other investors @rzullo @awalsh @drew.aldrich @josef_feldman @chad — would you be OK with one of your companies / prospective companies raising part of their round from the crowd? Any scenarios where you’d encourage it?

[2:13]
@nkrobles:

Mat Dellorso [2:13 PM]
I believe the broker-dealer or registered funding portal, where all title III offerings must take place on, would take on that responsibility of making sure the investors are suitabile ie have not invested more than the thresholds

Josef Feldman [2:13 PM]
@mdellorso: have you seen any clever twists on crowdfunding, such as limiting participation to engineers or other true value add investors who may otherwise not have any ‘skin in the game’

[2:14]
@jayfarber: I’d want to know how this looks on the cap table and if there are any long term regulatory requirements due to having retail investors involved

Drew Aldrich [2:14 PM]
Yes. I like equity as turning passionate, still somewhat affluent customers into true evangelists (apologize for being slow….have to type on cell).

[2:14]
So I like companies that are B2C, and “community based” i.e. Able for people to recruit others to the compmah

Mat Dellorso [2:15 PM]
Josef- I have heard of one clever offering that was discussing doing that in concept. I believe only 40 or so Form C’s — the form you need to file in advance of doing a title III raise — have been approved thus the use cases are just emerging

Drew Aldrich [2:15 PM]
Vcs to price the round, but carve out a small amount for existing customers

Jay Farber [2:16 PM]
One interesting angle could be secondaries. If I’m a VC I can either put $3M in now, or put $1M in with $2M from the crowd, and if I like it wait for the crowd to sell their shares to me as an effective ‘call option’ on the company

Mat Dellorso [2:16 PM]
One of the many limitations we see with the current regulations are that the investors, although exempt from the reporting number towards being a public company, all must be individually on the companies cap table so no SPV’s pooling into one entry on the cap table and how do you manage voting rights, distributions etc. Would most likely have to be a special class of stock with that governance

Josef Feldman [2:16 PM]
@mdellorso: are form C’s publicly listed? someone should create an aggregator for that!

Mat Dellorso [2:16 PM]
Yes for C data is publicly available via the SEC edgar database

[2:16]
we spend a lot of time analyzing Form D data at WealthForge

Chad Castro [2:17 PM]
Reg issues aside, won’t cap of $1M in a rolling 12-month period tamp enthusiasm for this type of funding?

Mat Dellorso [2:17 PM]
Also for A-1 is publically available for also relatively new Reg A+ data

[2:17]
Chad — yes we believe most companies over time will need to raise more. Issuers can do a Reg D offering as well

Jay Farber [2:18 PM]
Who here would consider actually making a Title III investment of their own $?

[2:19]
…bueller?

Mat Dellorso [2:19 PM]
I would, depends on the offering

Josef Feldman [2:19 PM]
@mdellorso: Have you heard of anyone trying to do a crowdfunded fund to invest in crowdfunding companies? an idea I had years ago when title II was starting to be discussed.

[2:20]
I think it could work

Mat Dellorso [2:20 PM]
So the fund would have to be done through Reg D or Reg A and then could invest in Reg CF offerings

Rick Zullo [2:20 PM]
Wasn’t alpha (Nick Chirls old shop) trying to replicate that passionate group of consumers around crwodfunding a product?

Drew Aldrich [2:20 PM]
I looked at the the gimlet offering…but passed

Rick Zullo [2:21 PM]
For me, that’s a lot more interesting than B2B (which is 99% of what I do) and I usually take it as a bad sign if someone has to crowdfund

Mat Dellorso [2:21 PM]
I have heard of and had ideas for a similar concept Josef, for broad diversification just Title III offerings are still new and relatively few thus far. Then there is the concept of direct investing vs the fees and management of a fund

Jay Farber [2:21 PM]
@drew.aldrich: Looking like a decent bet so far

Mat Dellorso [2:21 PM]
what these new regs do is allow for direct investing which is a unique phenomenon, yet the advice and transparency to sort through the offerings is not there yet = might still need analysts

Jay Farber [2:22 PM]
Interesting…who is the right equivalent of equity researchers in the public markets?

[2:22]
Things move so much more quickly, are illiquid, and much less data

[2:22]
And fewer restrictions around pumping a stock you own (or a deal you’re doing), I’d assume

Mat Dellorso [2:22 PM]
yes and on small offerings who pays for research?

Jay Farber [2:23 PM]
Maybe people doing the deal just publish the diligence work they did

[2:23]
Happens all the time when you get pulled in as a VC to a well-baked deal

Josef Feldman [2:23 PM]
I think angellist has accomplished this with their syndicate model as someone needs to lead diligence.. opening this up to the masses when no one particular party has enough economic incentive to truly dig in sounds a bit risky..

Mat Dellorso [2:24 PM]
Yes a lead or priced deal could make sense, a deal without a lead investor or no backing seems to be hard

Nikko Karlo Robles [2:24 PM]
@mdellorso: Just curious, any thoughts what “scale” looks like when Title III is in order? Like how many non-accredited investors are do crowd-equity platforms look to engage with?

Mat Dellorso [2:25 PM]
Real estate is another interesting vertical for crowdfunding. If a sponsor allows a community to invest and earn a projected IRR of say 8% thats not bad for a non accredited investor who cannot buy or invest in real estate with small dollars

[2:26]
@nkrobles: good question. In our Reg D offerings we often see 30 investors per million. In CF offerings I would imagine that number would be multiplied by 10 or 100x

Rick Zullo [2:26 PM]
but how can you market a 8% IRR security

[2:26]
with out significant protections around it

[2:26]
lack of knowledge around default rates, etc.

Jay Farber [2:27 PM]
Probably listed as 8% coupon, so to speak. Not risk-adjusted.

[2:27]
That’s how I’ve seen RE deals at least

[2:28]
Alright — let’s be creative in these last few minutes. What’s your best pitch for a crowdfunding platform you think could effectively leverage title III? Here’s mine: collective diligence. You work as an online angel group where you each come from an industry (say, retail), and each ask your company if they would stock a given consumer product. Whoever wants in on the deal gives an answer from their company, and the deal only goes through if enough people’s answers are positive

Josef Feldman [2:29 PM]
@rzullo: I think this is also a reflection of the adverse selection problem as well. The general trend with P2P has always been to move upstream and towards institutional capital. Why would a good deal be listed on a crowdfunding site? The crowds do not seem to have as much access to capital or diligence as institutional investors who exist to provide this function (consumer products / Kickstarter type campaigns being the exception)

Mat Dellorso [2:30 PM]
Also with regard to scale question. About 40,000 companies raised money via Reg D in 2015. If everyone of those companies chose to do a Reg CF, thats only 40B at scale vs Reg D which is a $1T market annual

Rick Zullo [2:30 PM]
Isnt that how ethereum was funded?

[2:30]
thought I read an article about that the other day, 100% anonymous vote

[2:31]
For me, I think pooled portfolios and later stage companies make a lot more sense

Mat Dellorso [2:31 PM]
I do think there are angel group 2.0 type applications

Rick Zullo [2:31 PM]
I also wonder when VC funds will be able to crowdsource capital

Gul [2:31 PM]
@jayfarber: I’d be super interested in joining an investor syndicate w/ a small amount contribution, especially in a space that I understand well. As things take off, I think whats personally interesting to me is how this enables you to tap your networks for investment opportunities in promising startups (even if your network is not inv. or venture focused)

Rick Zullo [2:31 PM]
effectively already happening with angelist syndicate

[2:32]
ditto to gul

Mat Dellorso [2:32 PM]
SPV’s are capped at 99 investors

Gul [2:33 PM]
@jayfarber: thanks for organizing this J. Super interesting / informative. Looking forward to a follow up chat on inv. opportunities w/ promising Fintech startups!

Josef Feldman [2:33 PM]
@jayfarber: fun! I’d say a platform that copies what Juno is trying to do to Uber but across all sorts of industries.. that’d be a fun experiment

Jay Farber [2:33 PM]
Hey all, we can keep chatting here but for those who have to drop off now — thanks for joining! Stay tuned for part 3 coming soon…

Josef Feldman [2:34 PM]
Thanks @jayfarber for moderating and @mdellorso for leading. this was great

[2:36]
@channel: taking suggestions for next topic to cover if anyone has requests / particular interests within Fintech

Mat Dellorso [2:36 PM]
Thank you Josef and Jay

Rick Zullo [2:38 PM]
thanks guys!