AngelList, the crowdfunding trailblazer, who was “equity crowdfunding” before people even knew what that meant, initially started as simply a matchmaker for angel investors and startups. As a legal and securities nerd I understand the difference between the Magna Carta and the AngeList SEC No Action Letter – but they were close.
In 2010 they officially started the site and brought on Kevin Laws as COO. Initially AngelList’s value-add was a set of standardized legal documents; now, it provides employment resources, syndications and financing opportunities for startups and small companies.
Because AngelList was technically providing assistance to issuers by using form documents and giving a helping hand, the SEC issued an inquiry letter from SEC enforcement questioning their non-broker-dealer status. Once it was explained that AngelList was not receiving any compensation for its activities, the SEC backed away.
It was quickly clear to the young platform that AngelList activities may cross certain legal lines and new regulation or no action relief (letters provided by the SEC which ensure that they will not prosecute certain behaviors) was necessary. In 2012 new regulation came in the form of Section 201(c) of the JOBS Act. Not enough has been written regarding this JOBS Act provision which allows an online platform to avoid registration and compliance as a broker or dealer pursuant to the federal securities laws as long as it doesn’t take transaction based compensation, or custody of customer funds, or is otherwise disqualified from participating in the securities industry, but there it is. In addition, in 2013, AngelList received the much heralded no-action letter that allowed for their syndication model to exist (and thrive).
The syndication model allows for certain seasoned investors to amalgamate other investors they may know, or who may know of them, to co-invest in businesses they deem worthy. Other investors in their network may choose to tag along in the lead investor’s decision based on such investor’s past track record, experience or otherwise. The process basically provides for another level of vetting.
Looking at all investment models – AngelList has some impressive stats:
- 2,500 companies with successful raises
- $250 million in funds raised “via” AngelList (this number is 100% verifiable through the platform and may be a little light)
- 30,000 accredited investors in their network
Interestingly, Kevin Laws, the COO, stated that in general most companies fail and they have had a 33% to 50% failure rate of the companies that flow through the site. While this is on par or better than most VC firms, it doesn’t square with the stats of the equity platforms in the UK. I chalk this up to AngelList’s experience in the space and higher volumes. Kevin simply felt people may not be investing “risky enough” over there.
Kevin maintains that the prescreened pool successes outweigh the failures and with success stories like UBER it is hard to argue. At AngelList diligence in conducted in multiple ways. First there is the diligence of the lead investor, who is likely committing a big check. Then there is the crowd who reviews the company and the credentials of the lead investor. Finally when the deal is set to close, AngelList itself conducts certain diligence procedures. This process has helped create an environment which Kevin proudly describes as where “sophisticated investors make investments in non-fraudulent companies” – a veritable utopia as for as I am concerned.
While disheartened, like many of us, at the under-utilization of new Rule 506(c) and its ability to generally solicit (advertise), Kevin is hopeful that it will gain traction and the SEC will provide guidance as to reasonable accreditation steps. When describing company expectations and the value AngelList provides to companies, Kevin noted that companies love the access to sophisticated investors and the standardized transaction terms, but still have a hard time with the fact that the internet doesn’t create free money. Companies still have to launch a campaign that takes work just like a Kickstarter or Ingdiegogo project; and if you build it – they might not come.
As final food for thought, I leave you with Kevin’s top four investment screening items. Before you launch your raise or invest in your next startup, consider the following:
- Team – how much experience does the team have with startups in general and this particular industry or product specifically?
- Traction – how many followers, users, members, etc. does this product or service have?
- Social proof – how many investors or followers does this company or management team have?
- Technology (sometimes) – what IP or other barriers to entry does this particular product or service have?
If you have solid answers to the first three and potentially four questions above, you may be a solid candidate for AngelList.
Georgia P. Quinn, a senior associate in Seyfarth Shaw LLP’s Corporate department, has spent her career representing public and private companies and investment banks in a wide range of capital markets transactions, including registered offerings and private placements of debt, equity, and hybrid securities. Over the last year, Ms. Quinn has led Seyfarth’s Crowdfunding Initiative, helping clients stay at the forefront of the enacted and proposed SEC regulations. Georgia has conducted webinars, presented to the New York State Bar Association’s Securities Law Section and the Business Law and International Sections, has been featured on Crowdfund Insider and has been invited to chair a panel on Crowdfunding for the American Bar Association in April. All views and comments above are strictly her own views and do not reflect the opinion or position of Seyfarth Shaw.