This CEO Perspective discusses the changing dynamics in the investment sector driven by the practice of crowdfunding. I’ll make reference to S-Ray with emphasis on our use and planned use of it.
Crowdfunding is another aspect of the JOBS Act – a legislative response to the financial crisis and Great Recession of 2008. As we continue to recover from the event, we are able to better understand what we went through. We are now able to refer to the crisis by the year it started – 2008 with a growing consensus that it began to end in 2010. We now understand it was the most severe economic downturn since the Great Depression of the 1930’s.
In simple terms, crowdfunding allows private companies the opportunity to sell stock to individuals through direct marketing which we see most often as web-based. Prior to this legislation, a company like S-Ray could only offer stock to individuals that were introduced to the opportunity by the company officers, directors and other shareholders. This type of offering was referred to as “friends and family”.
While S-Ray has raised about $11 million from “friends and family”, we are very close to completion of the documentation and process to enable a crowdfunding campaign to finish our pre-IPO phase. The opportunity of crowdfunding requires the company to follow certain processes including a “third party verification” of qualified investor status for potential investors. It is our belief that these additional processes and more rigorous documentation may add expenses and slow the fund-raising. However, it is also positioning S-Ray for an IPO and the resulting liquidity opportunity for our shareholders.
One risk to executing a successful crowdfunding campaign is not having a “crowd”. Part of our work in preparing for this campaign and the IPO is to define our crowd. Crowdfunding failures define their potential investors as “anyone with money”. Successful campaigns prospect for investors who understand the products and believe those products are substantially better than the existing competition. An additional factor of a successful crowdfunding campaign is that the products are relevant to the investor. In our case, a potential investor who is a dentist is very aware of the innovative aspect of S-Ray products. This relevance to the investor increases our probability of a successful campaign.
Another aspect of crowdfunding is that it removes the very expensive middlemen of “Wall Street” and enables S-Ray to sell stock directly to “Main Street”. This direct relationship means S-Ray avoids fees (typically a minimum of 10% of the cash raised AND at least 10% of the company stock) which would cause existing shareholder dilution.
In closing, S-Ray is utilizing the crowdfunding component of the JOBS Act to provide capital and prepare for a potential IPO using another aspect of the JOBS Act – a Regulation A, Tier 2 offering. I’ll be going through the details of this type of IPO in my next CEO Perspective, with emphasis on shareholder liquidity options with examples.