If you had invested in Uber (now valued at $40B) in 2011, you would currently be sitting on a 600x return. Unfortunately, unless you were already very wealthy, securities laws would have prevented you from being able to invest in the these companies.
Early adopters have historically been prevented from crossing the threshold from customer to investor. However, a fundamental shift in the relationship between consumers and companies has been set in motion by new SEC regulations set to go into effect on June 19th.
Most early adopters interested in supporting private companies have been limited to rewards-based crowdfunding. This type of crowdfunding has proven to be a poor substitute for true early stage investing. Rewards-based crowdfunding websites such as Kickstarter allow individuals to pre-order products or donate towards something that they want to exist in the world. These “backers” do not get shares or equity in the company. Although these backers take on significant risk, they do not get any significant upside.
The story of Oculus VR is apt. Nearly two years after its celebrated rewards-based crowdfunding raise, Oculus was acquired by Facebook for $2B. Oculus’ early Kickstarter backers felt angered and betrayed. Though they had a sense of ownership in the company, they reaped no benefits from the transaction. Meanwhile, the institutional and accredited investors who invested in Oculus after the Kickstarter campaign (and in large part because of the Kickstarter campaign) made a large amount of money in a short period of time. $300 in equity in Oculus at the time of the Kickstarter campaign would have been worth approximately $45,000, a 145x return.
Successful technology startups owe it to their early adopters to let them participate in the company’s financial success. These are the people who realized the company’s potential before the public and provided the momentum to turn that potential into a reality.
Because companies are increasingly staying private longer, by the time a company actually IPOs (if ever) the knowledge advantage of being an early adopter has evaporated and the opportunity for investors to realize a significant return on their investment has disappeared.
Some forward thinking companies, like LendingClub and GoPro, have recognized this and rewarded their customers by letting them participate in their IPOs at the same price as the institutional investors.
However, this has historically been difficult to accomplish prior to a full IPO, due to securities laws which made it nearly impossible to sell shares to unaccredited investors (i.e people making less than $200,000 per year and having a net worth less than $1M). Now, all of this is about to change.
Effective today, the new Regulation A+ of Title IV of the JOBS Act will allow companies to raise up to $50M in a mini-IPO from the public, including their early customers. Companies will be able to “test the waters” and poll their users to see if they are interested in investing.
If there is sufficient interest, the company will be able to proceed with the offering by filing a registration document with the Securities and Exchange Commission and obtaining their approval. While not a simple process (likely $100,000+ in expense and 3-6 months), it is much easier than a full IPO ($1M+ in expense and 1-2 years).
The implication this has for early customers is profound. Because companies are increasingly staying private longer, by the time a company actually IPOs (if ever) the knowledge advantage of being an early adopter has evaporated and the opportunity for investors to realize a significant return on their investment has disappeared.
Reg A+ allows individuals to capitalize on their foresight and be rewarded for their brand loyalty. No longer will an early adopter be merely a company’s customer. Rather, they can be stakeholders in the companies they love, tying a company’s ultimate success to their own financial outcome.
The ability to raise capital from early adopters is equally attractive to companies as it is to customers. From a company’s perspective, Reg A+ presents an opportunity to invite their brand evangelists to participate in the financial success of the business.
Regulation A+ has the potential to redefine the relationship between customer and company, burring the line between early adopter and investor.
Furthermore, by allowing their customers to become shareholders, companies will be able to increase brand loyalty. Individuals who are both customers and shareholders have a vested interest in the long-term success of a company and may be more likely to spend their dollars in a way that benefits their investment portfolio and by extent, the companies in which they are invested. Research from public company stocks suggests that customers who own shares in a company spend 54% more and refer twice as many people.
Regulation A+ has the potential to redefine the relationship between customer and company, burring the line between early adopter and investor. Companies such as Uber, Airbnb, and Instacart have capitalized on the network effect of the expanding sharing economy. Through Reg A+, the sharing economy mentality is being brought to the private capital markets; from now on early consumers will have the chance to share in the economic success of their favorite companies.