The Oculus-Facebook Buyout: The Best Ad For Equity Crowdfunding Ever

I have written about the misconception by some members of the general public that equity crowdfunding and rewards-based crowdfunding are the same thing.  Many people are misinformed and do not understand that Title III of the JOBS Act has nothing to do with rewards-based crowdfunding. If you don’t believe me, read some of the comments to the SEC where comment writers were unnecessarily worried that equity crowdfunding would kill Kickstarter and its ilk.

… if Title III had been available to Oculus to use “equity crowdfunding” two years ago, it is interesting to think about what could have happened.

The public outcry over this non-issue reached a fever pitch recently when Facebook paid $2 billion to buy Oculus, a technology company into virtual reality video gaming. A couple of years ago, Oculus used Kickstarter to crowdfund the Oculus Rift virtual reality headset. On Kickstarter, Oculus crowdfunded almost $2.5 million from nearly 10,000 donors, making the campaign one of the most successful in rewards-based crowdfunding history. The donors to this campaign received items like posters, T-shirts and, for larger donations, a developer kit that for game developers. Nobody thought they were buying stock in Oculus when they contributed to this crowdfunding campaign, and if Oculus had tried to sell stock, they would have been breaking the law because Title III equity crowdfunding is not yet legal.

Oculus Rift Coaster Experience

When Facebook bought Oculus for $2 billion, many people took to social media to start complaining. There was a good deal of misunderstanding from people (most of whom were not actually backers of the Kickstarter campaign) who could not understand why the people who gave their hard-earned money to Oculus were not sharing in the wealth of the Facebook windfall.  These misguided people could not understand why a $15 donation to Oculus only got the donor a poster and a thank you, and not shares of Oculus stock and a lottery-like payoff from the Facebook buyout.

Of course, this is nonsensical and nobody who contributed to the Oculus rewards-based crowdfunding campaign expected to own a piece of the company. But, if Title III had been available to Oculus to use “equity crowdfunding” two years ago, it is interesting to think about what could have happened. Let’s pretend for a moment that the SEC rules were in effect at that time, and Oculus had the option when they did their Kickstarter campaign of selling stock through an equity crowdfunding portal instead.

jobs actOculus would have had to comply with all of the disclosure and due diligence required of Title III equity crowdfunding. They would have had their officers, directors and all shareholders with 20% ownership or more go through “Bad Actor” background checks. To raise more than $500,000, they would have disclosed audited financial statements. They would have disclosed a business plan. After handling all of this compliance, they would have been allowed to sell shares in their company online through equity crowdfunding. But, they would have been capped at selling $1,000,000 in stock under the JOBS Act.

Let’s assume Oculus would have actually jumped through all of those hoops, rather than just saying “Hey, let’s do a Kickstarter project where we don’t have any of those disclosure requirements, no due diligence, and we are not capped at $1 million.” If Oculus had offered, say, 10% equity in their company for $1,000,000 through an equity funding portal to the crowd in $1,000 shares, that would have meant 1,000 lucky people could have invested in the company. Assuming no dilution occurred, and making a whole lot of other assumptions that have no reasonable basis in fact, those investors would have shared 10% of the Facebook money or $200 million. Roughly translated under this fanciful scenario, a $1,000 investment would have been worth $200,000 in the Facebook buyout.

This is why people are excited about the prospect of Title III equity crowdfunding. Try getting that kind of return on Wall Street.

The truth is very few startup companies who use equity crowdfunding when it is legal will provide this huge of a return for investors. In fact, a good number of startup companies will fail and the investment will be completely lost in each of those cases. Investing is startup businesses is very risky. There is a big payoff when a startup is very successful, and a large downside when the startup fails. People should invest in startups with their eyes wide open, and only after doing their due diligence and appropriate research.

The Happy CrowdThat being said, the Oculus-Facebook deal is, in my opinion, the best ad for equity crowdfunding that I have seen. Instead of printing misleading editorials in the New York Times and Bloomberg using the Oculus deal as an example of why crowdfunding is bad for investors (which is idiotic because none of the Oculus Kickstarter backers are “investors”) the media should be using this buyout as a prime example of how great equity crowdfunding could be for the economy. If Title III were in place and legal when Oculus decided to go crowdfunding on the internet, many people could have received a huge financial benefit from investing in the company. But, because the SEC rules were still in limbo at the time (and still are as I write this), so the only people who benefitted from the buyout were the founders and other owners of Oculus shares. Instead, some of the media has fanned the flames by claiming “investors” were taken advantage of by Oculus, and even proposing that more restrictions should be placed on equity crowdfunding to “protect investors.”

Where are the media people when the elderly on fixed incomes are taken by the busload into casinos around the country? Why are they not proposing that, before grandma enters a casino, she has to prove her net worth at the door and then be limited as to how much she can gamble in the slot machines? Should grandpa have to show his bank statement at the convenience store and then be limited on how many lottery tickets he can buy? Why is the media not proposing limits on how much can be gambled, if they truly want to economically limited “investors” from losing money?

The Oculus deal shows why equity crowdfunding will be a great thing that could revitalize the American economy. Small businesses and entrepreneurs will be able to raise money, start and grow businesses, and create jobs. And, someday some of those businesses will be bought out for billions, and then equity crowdfunding investors will reap the rewards. Some day hopefully, the media will understand.

Kendall Almerico CEO of ClickStartMeKendall Almerico is a nationally recognized crowdfunding and JOBS Act expert who has appeared in USA Today, Huffington Post, the New York Daily News, Business Insider, Fox Business Network and hundreds of newspaper, blog, radio and television interviews including CNN and The Sean Hannity Show. Almerico is also CEO of ClickStartMe, a crowdfunding site that provides individuals and businesses with an easy-to-use website to raise funds through online crowd funding. Almerico is also the founder of CrowdItForward, a charity-based crowd funding site that performs “Random Acts of Crowdfunding” and raises money for people in need through a 501(c)(3) charitable foundation.

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  • Shane DuNann

    Kendall, Thank you for writing this article and clarifying how so many of the previous articles argue an idea that doesn’t make sense. Your article is not poorly researched, it is perfectly positioned to inform others about the misconceptions that arose from the Oculus deal. It’s a pity that so many writers imply that the backers were somehow ripped off. They weren’t, and it’s extremely misleading to say so.

    I was surprised at how much negative light was shed on the deal when in fact it only proved how fantastic Equity Crowdfunding could be, like your article explains. If anything, the deal with Oculus showed us how much we need to focus on education and transparency. If outsiders knew more about rewards and equity Crowdfunding and the differences between them, so many of those nonsensical comments would have never been written. If Oculus sent out a message letting the backers know they are in talks about a possible sale of the company, that could have eliminated some of the bitter surprise for the backers that thought Oculus would forever remain an “indie” business.

    We have some work to do before the general public truly understands the process.

    • Crowd It Forward

      Great points Shane. Time for all of us to keep educating the masses!

  • Crowd It Forward

    Thanks for the kind words from Ms. Marcus and Mr. Cortez, and thank you Mr. Guzik for your insightful comments. You are very correct in your analysis (not surprisingly, given your level of expertise) that there is plenty of work to be done to make both Title III and Title IV viable and workable. My thought in saying that the Oculus story is a great ad for “equity crowdfunding” is to point out how IF (an only if) there was a viable equity crowdfunding law in place when Oculus did their Kickstarter campaign, then supporters would have had a chance to invest in the company, rather than just donate in exchange for rewards. Notice, the headline does not say the Oculus buyout is a great ad for the JOBS Act, or for Title III, it says for “equity crowdfunding.” I was trying to help people understand the differences between rewards-based and equity crowdfunding, and also to let people realize how great true equity crowdfunding could be, if the laws and rules were done right. I am with you on this one…the SEC is not likely to be the answer, it is going to take Congress, and JOBS Act 2.0 to really make this what it should be. Thank you again Sam, for your comments.

  • Josie Marcus

    I agree with the author. Why is government telling us what we can and cannot invest in, but they let old people with no money throw it all away on lottery tickets and casinos. I understand putting some limits on what people can invest to protect them from themselves, but is investing in a crowd funded equity deal with a startup any more risky that buying a lottery ticket? This is a very good article that really helped me to understand the differences between the various kinds of crowd funding.

  • Samuel S. Guzik

    Not sure I agree with the headline: “best ad for equity crowdfunding ever -“, at least not until our federal securities laws are overhauled so that startups and emerging growth companies have practical paths to raising capital from the crowd.

    Nor can I agree that the way Title III was signed into law:

    “The Oculus deal shows why equity crowdfunding will be a great thing that could revitalize the American economy.”

    As Mr. Almerico points out, in a Title III crowdfund raise Oculus would have to jump through a lot of hoops – rigorous disclosure, audited financials, etc – to raise the maximum of $1 million permitted under Title III of the JOBS Act – less than half of Oculus’s wildly successful rewards-based crowdfunding.

    So if you were Oculus, and Title III crowdfunding was in effect, which path do you think they would have taken?

    And what the crowdfunding community seems to have missed entirely from the top of the leadership down, both when the JOBS Act was signed into law, and even recently, is that there might have been better alternatives than Title III to crowdfund a raise over $1 million. Title IV of the JOBS Act, Regulation A+, could have been the ticket for crowdfunders looking to raise Oculus-size rounds – if only Congress had not been sidetracked by partisan politics, and if the leadership in the crowdfunding community recognized the value of Title IV as an equity crowdfunding vehicle when the JOBS Act was winding its way through Congress.

    Sadly, this has yet to happen.

    Even Title IV in its present, imperfect form, has some limited potential to serve as a crowdfunding vehicle for heftier, Oculus sized raises (what I have termed “CrowdfundingPlus(TM)) – at least if the SEC makes some smart decisions when it finalizes the Regulation A+ rules it proposed in December 2013. My thoughts on this option for the SEC (the only crowdfunding option available to the SEC under Title IV without further Congressional action) were presented to the SEC in my comment letter of March 24, 2014 (reprinted in Crowdfund Insider on March 24, 2014

    The better solution for Oculus-sized crowdfunding raises will require Congress to tweek Title IV to make it look more like the Regulation A it was supposed to fix – reviewed financials, instead of audited financials, and light ongoing disclosure, with raises up to $5 million. This will happen, but not until at least 2015 unless the political gridlock in Washington thaws before then.

    Until the flaws in Title III and IV are ironed out in Congress, Oculus will likely not serve as the poster child for what is right about equity crowdfunding under the JOBS Act – but rather, what is still awaiting repair under JOBS Act 2.0.

  • Armando Cortez

    Great article! As always, Kendall Americo is right on and helps us all to understand what equity crowdfunding is going to be. I love the “what if” concept that gives us all a taste of what may be coming with equity crowdfunding in the near future.

  • Rob Murray Brown

    This is just so poorly researched – this guy may call himself an expert but he is just a equity CF PR man. You simply cant take somehting like this completely out of context and come up with these conclusions – not if you want people to take you seriously. The Oculus deal was not and was never intended to be a ECF deal and to make the leap that Kendall does suggests he thinks he is Bob Beaman.