crowdfunding to commercialize inventions and innovations through startups - thomas sharbaugh
DESCRIPTION
There has been much news coverage of Internet-based crowdfunding recently, including stories about entrepreneurs who have funded diverse projects through donation crowdfunding on popular sites, such as Kickstarter, as well as stories about the developing federal securities laws for investment crowdfunding. With large dedicated pools of alumni, universities and colleges may be particularly well positioned to take advantage of crowdfunding as a means of funding the development of inventions and innovations by their scientists. The securities laws with respect to investment crowdfunding are still evolving and will impact how broadly this trend will be adopted.TRANSCRIPT
University Crowdfunding
University Economic Development Association
Tom SharbaughSeptember 29, 2014
University Crowdfunding
1995—Two grad students meet at Stanford
1996—Begin work on Internet app
1998—Receive $100k from angel investor
1998—Form company with license of Stanford patent
1999--$25 million of venture capital
2004—IPO market value of $1.67 billion
2004—Stanford yields $336 million
University Crowdfunding
University Crowdfunding
Total Crowdfunding Market
University Crowdfunding
What is it?
› Roots in Crowdsourcing and Microfinance Wikipedia Grameen Foundation
› Making a big task possible by breaking it down into multiple smaller tasks
› Internet is ideal for this
University Crowdfunding
Many older examples
› Jerry Lewis’ Labor Day Telethon
› NPR Fund Drives
› United States saving bonds
University Crowdfunding
Early adopters: often used by rock groups going on tour
•CD of concert
•Concert tickets
•Back-stage pass
University Crowdfunding
Crowdfunding
DonationInvestmen
t
University Crowdfunding
Donation crowdfunding
› Kickstarter, Indiegogo, RocketHub and more
› Rewards are often included
Similar to an NPR fund drive
› University programs typically have nominal rewards
University Crowdfunding
Donation crowdfunding
› All or nothing vs. keep it all
› Platform/credit card fees—8% to 10%
› Huge marketing/public relations burden
Social media
University Crowdfunding
University Crowdfunding
University Crowdfunding
Risk of “cannibalizing” University contributions
› Loyal pool of potential donors
› Target other potential donors Non-alumni Alumni non-givers Millenials/recent grads
› Increases donor base for future contributions
University Crowdfunding
SpecificNon-
ResearchProjects
University Donation CF
Annual Fund
Specific Research Projects
University Crowdfunding
Unrestricted Contributions to Annual Fund
• Specific time period
• Columbia
• Vassar
University Crowdfunding
Contributions to Diverse Student Projects
• Band uniforms
• Campus flood
• Sports team
• Philanthropic trip
University Crowdfunding
Research-specific donation Crowdfunding
› University’s own site, or
› Independent academic platforms
Experiment.com Petridish.org Fundageek.com--closed
University Crowdfunding
Research-specific donation crowdfunding
› Promotional efforts are essential
Social media
Possible use of University donor lists
› Rewards
University Crowdfunding
Research-specific donation crowdfunding
› Tax-deductions
Up to 40% “discount”
Cannot contribute to benefit specific individual
University Crowdfunding
University research platforms
• Donations to universities
• May tap into alumni
• Tax-deduction likely
• Generally, no rewards
University Crowdfunding
Non-university research platforms
• University may/may not be involved
• Tax-deduction uncertain
University Crowdfunding
SpecificNon-
ResearchProjects
University Donation CF
Annual Fund
University
Startups
SpecificResearchProjects
University Crowdfunding
Startup businesses
› ~75% of inventions are never licensed
› University can license technology to new company
› University receives minority equity stake
› Some universities have “incubators”
University Crowdfunding
Startup businesses
› Working capital has to come from somewhere
Further research, production, marketing, etc.
› Alumni are a receptive pool of potential investors
University Crowdfunding
Startups vs. licensing
› Pro: more potential gain as part owner
› Pro: gains linked to company-wide performance
› Pro: promotes local job growth
› Con: big licensee likely more stable
› Con: big licensee likely has management experience
University Crowdfunding
Brookings Institution: “University Start-ups: Critical to Technology Transfer”
University Crowdfunding
Types of Crowdfunding “return”› None—donations to a cause (22%)› Reward
Usually something consumed Often the new product being produced
› Prepurchase right Right to buy the new product
› Financial Ownership or interest on a loan
University Crowdfunding
Financial return = “security” status under Federal and State securities laws
› Regulate the offering of securities
“Registration” unless exempt
Significant disclosure requirements
› Regulate those engaged in offering and sale
University Crowdfunding
Regulation D exemptions—pre-JOBS Act› Rule 506—unlimited dollar amount
Unlimited “accredited” investors and up to 35 “sophisticated” investors
“Accredited” investors
Net worth (excluding home) > $ 1 million Annual income > $200,000 ($300,000
with spouse) Often include “angel” investors
University Crowdfunding
JOBS Act of 2012
› Two big changes relative to capital raising:
Title II—general solicitation for offerings up to $5 million if directed solely at accredited investors
Title III—up to $1 million through a “funding portal” to unlimited number of investors
University Crowdfunding
Title II Crowdfunding
• Not just for startups
• Early adoption by real estate developers
• Prodigy Network closed on two hotel projects
• $31 million
• $25 million
University Crowdfunding
JOBS Act of 2012
› Title III Crowdfunding exemption
SEC published proposed rules October 23, 2013
Comments received for 90 days
CANNOT use exemption until final rules are published
Still waiting for final SEC rules
University Crowdfunding
JOBS Act of 2012
› Title III “Crowdfunding” exemption
Must use a “funding portal ” or registered broker/dealer
General solicitation—possible with Internet
May raise up to $1 million during a 12-month period
University Crowdfunding
JOBS Act of 2012
› Title III “Crowdfunding” exemption
Investment limitations over 12-month period
If income or net worth is < $100,000: greater of $2,000 or 5% of income or net worth
If income or net worth is > or = to $100,000: up to $10% of income or net worth but not more than $100,000
University Crowdfunding
JOBS Act of 2012
› Title III “Crowdfunding” exemption
Disclosure requirements
Narrative description of the company and its business
Financial statements
Offering > $500,000, audited financial statements
University Crowdfunding
Is Crowdfunding better under Title II or III?Title II (accredited
only)
Title III
Maximum offering
Unlimited $1 million
No. of investors Unlimited Unlimited
Investment limit per investor
Unlimited Yes, based on income/net worth
Investor disclosure None required As specified by SEC
Intermediary Not required Required
General solicitation(social media)
Yes No
University Crowdfunding
Federal investment Crowdfunding
› Title II: Available now
Only accredited investors
› Title III: Not yet available
Crowdfunding “for the masses”
University Crowdfunding
State securities regulation
› Most states require registration or an exemption
Usually have exemption for offerings to limited number of investors
› New Federal crowdfunding exemption under Title III will preempt state registration requirements
› States can still pursue fraud investigations
University Crowdfunding
State attempts to sidestep federal rules
› Single-state crowdfunding
› Reliance on intrastate exemption
› Offering to residents of a single state
› General solicitation possible
University Crowdfunding
Practical startup issues
› Lack of liquidity
No trading market initially and perhaps indefinitely
› Possible large number of stockholders with diverse goals
University Crowdfunding
Frequently Asked Questions:
› Isn’t licensing much easier?
University Crowdfunding
Frequently Asked Questions:
› Isn’t licensing much easier?
› Is it realistic to expect alumni and others to donate for research?
University Crowdfunding
Frequently Asked Questions:
› Isn’t licensing much easier?
› Is it realistic to expect alumni and others to donate for research?
› Do universities ever retain majority ownership in tech startups?
University Crowdfunding
Frequently Asked Questions:
› Could startups just do an IPO?
University Crowdfunding
Frequently Asked Questions:
› Could startups just do an IPO?
› Can a university use a broker?
University Crowdfunding
Frequently Asked Questions:
› Could startups just do an IPO?
› Can a university use a broker?
› Why not solicit venture capital firms?
University Crowdfunding
Frequently Asked Questions:
› Could startups just do an IPO?
› Can a university use a broker?
› Why not use venture capital firms?
› What is impact on other stages of financing?
University Crowdfunding
How big is the market?
› Forbes magazine
Title II--$20 billion
Accredited investors
Title III--$2 trillion
Non-accredited investors
Follow Innovosource to monitor university investment activity
› http://www.gapfunding.org/community/news/
› Recent news:
University of California has new $250 venture fund
Innovate Indiana startup gets $10 million in venture round
Illinois starts fund for startups at IL-based universities
University Crowdfunding
University Crowdfunding
University Crowdfunding
University Economic Development Association
Tom SharbaughSeptember 29, 2014