CAVEAT – I want to get this right out front and in everyone’s face before you read this. I am NOT a fiduciary and I’m not giving you advice on whether to you should buy these sorts of investments. Everyone needs to know that these investments are high risk and they don’t work like normal stocks. So first and foremost, BE CAREFUL and BE THOUGHTFUL before you get involved.
Now that we have that out of the way, let’s get into this thing. I’ve actually been leaning towards getting into angel investments for some time. Becoming an accredited investor some years back put it on my radar, but the opportunity to really help a lot of small startups in my community was well balanced by the extreme risk involved in these sorts of ventures.
Just as I’d become serious about building my portfolio and pursing the idea, the JOBS Act passed and opened up another option, Title III or sometimes called crowdfunding investments. A few months later, I watched the Crowfall guys lead the industry out of the gate. That’s when I started calling all the smart people I’ve met over the years and began collecting opinions and thoughts.
Today, I’m turning those conversations to your advantage while we look at why you should approach these investments with extra caution and then explore their advantages a bit. Lastly, we’ll touch on some of the things you should look for if you did decide to pursue something like this.
Cautions and Warnings
These investments are not stocks or mutual funds like you might buy from Edward Jones or some day trading website. In part because they’re so extraordinarily risky compared to most other available stocks, but also because you’re in them for the long haul. If you invest $10,000 in Wells Fargo and then run onto lean times, you always have the option to sell your shares and then use whatever money you get for them elsewhere.
Unlike stocks, crowdfunding raises are more like Regulation D investments (angel investment, venture capital, ect) in that once the money goes in, you don’t get it out until certain conditions are met. Typically, these circumstances are things like taking the company public, in which case equity shares are converted to common stock at some pre-determined rate. Sometimes companies decide to share profits in the form of dividends, which is where the board elects to pay some amount per share to shareholders. The most common, and frankly the most realistic scenario in the gaming industry, is that the startup gets purchased by another larger company, in which case shareholders get a cut of the purchase price.
Be cautious! The road may look clear, but these sorts of investments are incredibly risky.
The main take-away there is that once your money is in, you’re not getting it out again until one of those situations occur. That means if you see the company take a down-turn, you also watch your money disappear with it. Potential investors need to think very carefully about how emotionally attached they are to these ventures and not get involved if they think that’s something they may not be emotionally equipped to deal with. These investments are risky. Have I said that before?
While Title III raises are sometimes called crowdfunding, it’s not like the Kickstarter crowdfunding everyone thinks of when they hear the term. One massive difference is that the startup/project may not be able to advertise their raise like they would a traditional crowdfund. I’ve heard this two different ways, some say you can’t advertise at all other than to point to the event’s site, and I’ve heard from others that you can but that everything has to be statements of fact with none of the typical advertising hyperbole. Either way, the marketing around these raises is very different from the more typical crowdfund, and that might make it harder to really understand what’s going on with it.
Upsides and Potential
One way Title III investments aren’t like the more traditional Regulation D opportunities is the requirement for a middle man. Title III investments are required to go through an SEC-licensed or FINRA-registered portal, which despite not being as quite great as it could be due to heavy restrictions around how you can discuss the offerings, is still pretty good for consumers.
For instance, the Crowfall opportunity is offered through Austin-based MicroVentures, who partnered with Indiegogo to create one of the first portals for Title III investments. MicroVentures does some initial filtering of projects before they allow them into the platform, which means non-accredited investors have at least a small barrier between themselves and particularly bad deals.
The other advantage to investing over gifting through something like Kickstarter is just that you get some equity for your donation to a project that you might have supported anyway. The age of supporting the games you want to see made is stepping into full-swing, so it makes complete sense for early adopters to have some long-term financial opportunity. Two Austin-based crowdfunding games that I’ve been following each raised over $10 million in non-Title III crowdfunding efforts, which is awesome and shows some demand for their products. Even better would be if those early supporters had some equity, as well.
Austin, Texas is playing an important role in the early days of these new investments.
Crowdfunding allows developers to reach for games that might not otherwise ever gain enough venture capital to launch, much less get picked up by a major studio. It’s the ultimate capitalist solution where the consumers drive success directly. If those early backers help get a project off the ground and it ends up being the next World of Warcraft, it makes complete sense that they get some sort of reward. VCs and angel investors certainly will.
Non-accredited investors can invest up to $2,000 in these portals, from what I’ve seen so far. Though that might be a little overly restrictive, based on my read-through of the Act and could change in time. Looking around MicroVenture’s offerings, it looks like $100 might be about the minimum. That puts these sorts of investments well within reach of a huge pool of potential new investors, and helps the companies by increasing the potential for their raises. More available money means more opportunities for indie projects with good ideas, and that seems like a good thing.
For the industry, it seems like this will be a really good thing and the market seems ready for it. The only down side I can see is that I’m a little worried about the first company to bust after a Title III raise. When a bunch of regular folks lose their investment because a project failed to make the turn, will law makers start reconsidering the JOBS Act? It’s definitely something to be worried about, because it really is almost too easy for folks to put money into these sorts of investments right now.
On the other hand, it might be just the cure for runaway projects. If a company takes money from an equity-backed crowdfunding effort, they have even more moral, and possibly a legal, obligation to use that money wisely. I can guarantee game projects holding $100 million in VC funding will spend it far differently than money simply gifted through a crowdfunding campaign.