Tips for Startups on Raising Old Money and Crowdfunding

Photo of Stephanie Chandler, partner of Jackson-Walker, courtesy of the law firm.

Photo of Stephanie Chandler, partner of Jackson-Walker, courtesy of the law firm.

Old real estate and oil money in town invested in San Antonio’s Rackspace early on, said Stephanie Chandler, partner with Jackson-Walker.

It was one of the first cases of old San Antonio money backing a startup technology venture here, she said.

Now with Geekdom, a technology incubator and accelerator in downtown San Antonio, the goal is to get even more local investment into startups, Chandler said.

“Over the last ten years there’s a much more significant uptick in what families are doing,” in investing in startup deals, she said. “Five years ago, we didn’t have the Rackspace founders looking at deals.”

Five years ago, the Center for Innovation and Technology Entrepreneurship at the University of Texas at San Antonio didn’t have its bootcamps in which it introduced mentors to support young startups, she said.

Historically, a lot of the family offices in San Antonio didn’t want to look at startup investments, Chandler said. But that’s changed.

“There is a lot of buzz going on at the San Antonio country club about what’s going on in town and trends,” she said.

Chandler spoke last week at Jackson Walker’s law offices in downtown San Antonio on “Raising Capital from New Money and Old Money: Crowdfunding and Family Offices in 2014.”

Mike Laussade of Jackson-Walker also gave a presentation to about 50 entrepreneurs in attendance.

“Most startups don’t attract money from lenders,” she said.

Angel investors generally put anywhere from $25,000 to $250,000 into a deal, Chandler said.

“Clearly they are motivated by getting a return, but they are also looking for something else,” she said.

For example, a lot of the successful entrepreneurs and executives with Rackspace are now investing in early-stage tech startups to give back to the community, Chandler said.

When startups raise money, it’s important that they adhere to federal regulations.

“Every single stock offering is required to be registered with the SEC,” she said.
That requires startups to provide audited financial statements and other expenses. But if you’re not doing a public offerings, there are exemptions to these rules.

“If a deal is truly private, you don’t have to register it,” she said.

The Securities and Exchange Commission’s Rule 506 provides an exemption to companies that allows them to raise an unlimited amount of money from accredited investors, Chandler said.

An accredited investor is someone who has net assets of more than $1 million not counting their house and income of $200,000 per year, Laussade said.

The Jobs Act allows for crowdfunding that allows companies to raise small amounts of money from large numbers of non-accredited investors, but it is not yet effective, Laussade said. The rules are still being worked out and might be adopted later this year, he said.

As of Sept. 23, the SEC adopted a New Rule 506( c ) that permits companies to solicit or advertise offerings as long as all the purchasers of the securities are accredited investors.

When dealing with old money, especially from the oil industry, in San Antonio some investors will not do a deal if it involves a 506-c solicitation which requires disclosure of investors, Chandler said.

“They are choices all along the path,” she said.

Once you go 506 ( c ), you can’t turn back, Laussade said.

Equity-based crowdfunding can only be done on a registered crowdfunding portal. And companies can only raise up to $1 million a year, Laussade said.

Securities law does not apply to Kickstarter and IndieGoGo because they are perk-based crowdfunding. The people donating money on those sites to projects are not investing in the company or getting any equity in exchange for their pledges.

To do equity-based crowdfunding from non-accredited investors, companies have to file a form C and provide audited financial statements. Those can cost $50,000, Chandler said. Companies also have to provide full disclosures on what they are doing.

“If you want to go stealth on your product, how are you going to do that?” Chandler said.

Annual reports are required. These are all things that are not required with a private offering, Laussade said.

“It’s going to be an onerous process,” he said. “And the rules aren’t yet final.”
The summer would be the absolute earliest the new equity-based crowdfunding rules will be effective, Laussade said.

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