Alan Aspera first learned he could go online to buy equity in private companies through, of all things, a book he read about a year ago. Today, Aspera has invested in two dozen startups, making him a prolific investor of sorts, contributing about $10,000 in total. One of his latest investments is his first foray in education technology, PenPal Schools.
Based in Austin, Texas, PenPal delivers online lesson plans and projects where students around the world can collaborate to learn about topics ranging from arts and languages to world cultures.
In PenPal Schools, “I saw its real-world application,” says Aspera, 41. “They offered project-based learning, which is more of my style. That’s how I learned growing up.”
In February, the company hosted a crowdinvesting campaign on Republic, one of the more popular platforms to attract individuals like Aspera—unaccredited investors who chip in small amounts. PenPal sought at least $25,000. By the round’s close on May 1, 2019, the company had raised nearly $75,000 from 242 individual investors. Aspera contributed $250.
Exchanges like Republic offer one of the newest ways companies can raise funds directly from individuals instead of institutions. Many of these websites resemble Kickstarter, in the sense that each company’s campaign page lays out a thesis and description for the product, accompanied by videos and testimonials. But instead of getting a product or swag like tote bags, in return for investment, crowdinvestors receive a small stake in the company.
For PenPal CEO and cofounder Joe Troyen, the money raised through Republic helped it hire a salesperson, and also attract new followers to the company who want a stake in PenPal’s possible future success. “Let those who helped us out along the way get skin in the game,” Troyen says.
How Crowdinvesting Works
Crowdinvesting—which also goes by equity crowdfunding and investment crowdfunding—became legal on paper with the Jobs Act signed by President Barack Obama in 2012. The Securities and Exchange Commission finalized guidelines in May 2016.
Crowdinvesting comes with rules for how much individuals can contribute:
- No one can invest over $107,000 in a 12-month period
- People who make or are worth less than $107,000 a year can invest a maximum of between $2,200 and about $5,350, depending on their annual income or net worth, during that period
- People who make or are worth at least $107,000 a year, they can invest at most 10 percent of their annual income or net worth without exceeding the investment limit
Startups pursuing crowdinvesting must follow strict rules. A company can raise a maximum of $1.07 million through crowdinvesting during a 12-month period. The more it raises, the more strenuous the financial reporting requirements it must follow. For rounds that exceed $535,000 during a 12-month period, companies must report financial statements audited by an independent public accountant with the accountant’s audit report.
People familiar with trading stocks will notice differences with crowdinvesting. Unlike publicly traded companies, startups that offer crowdfunded equity only have to report once a year instead of quarterly. Crowdfunding investors must hold on to their shares for a year before they can resell, unless they transfer the shares according to SEC rules.
A common form of security offered by startups are simple agreements for future equity—SAFEs—where an investor has not actually bought stock in the company, but rather receives stock once certain events happen, like an institutional financing round or IPO. PenPal, along with most startups pursuing crowdinvesting, offered SAFEs at $1 each through Republic.
In April, crowdinvesting platforms saw more than $200 million invested in companies using their services, according to Jonny Price, fundraising director at one of the largest crowdinvesting platforms, Wefunder.
Wefunder holds about a third of market share and has seen $70.5 million in investment funding, about a third of which has gone to food and beverage companies, followed by software and entertainment. Other major platforms include StartEngine, SeedInvest, MicroVentures and Republic, which Aspera used to invest in PenPal. At the time of reporting, EdSurge counted at least 15 education companies that tried popular crowdinvesting platforms. Some raised more than $1 million; at least one missed its funding goal.
Price says crowdinvesting offers an opportunity to support startups that are often underrepresented in mainstream deals, including those founded by women, people of color or based outside of the typical startup hubs in California, New York and Massachusetts. About half of the investment volume on Wefunder has gone to companies located in the other 47 states. And of the 38,000-plus people who have invested through platform, 27 percent were women, which Price says is higher than the percent for conventional investors.
On many of these sites, there is a strict vetting process into a company’s financials and business plans before they are allowed to list their campaigns. (After all, it would not look good for any platform to host many businesses that raise money but fail.) Price says Wefunder only accepts about 2 percent of applying companies onto its platform.
That means entrepreneurs have to be comfortable publicly sharing financial information that many are often sensitive about revealing. In Troyen’s case, PenPal Schools had to disclose a net loss of $460,000 in 2017 (although Troyen says the company is now profitable). It claims to reach more than 320,000 students from more than 7,000 schools across 150 countries; of them, 78 schools and districts are paying on average $1,770 per year.
Preparing these materials is not cheap. Troyen had to pay about $3,000 for the SEC filing form and to set up an escrow agent, per Republic’s rules. Troyen also spent about 15 hours to get everything in order. Republic also estimates companies may spend additional money on things like accounting, a lawyer and credit card fees to allow that payment method for investors.
Platforms like Wefunder have their fundraising success stories, such as a brewery that raised $1.19 million from almost 2,000 investors in a week. But crowdinvesting can also serve as a means to build a small following—something that can be handy to boost the visibility of one’s brand, says Troyen.
Through the campaign, he attracted new fans of the company and can use their contact information to keep them updated on company’s milestones and progress. “What was appealing about equity crowdfunding in general was the opportunity to get more people involved,” he says. Troyen says he would consider crowdinvesting again, but still plans to pursue more traditional financing routes when the time comes. The company has raised at least $1.25 million to date.
Chris Castiglione, who used Wefunder to raise about $40,000 for One Month, a New York-based startup that provides an online coding-training platform, agrees that the platform helped bring attention to a young startup in need of more students and teachers at the time. “It makes everyone an advocate,” says the company’s co-founder.
Troyen and Castiglione say crowdinvesting won’t replace traditional investors in the near future, given the cap on how much one can raise via the former. In addition, institutional investors often bring valuable market-specific expertise and connections. “It’s still more efficient to raise money the traditional route,” Troyen says.
Aspera, the PenPal crowdinvestor from Wahiawa, Hawaii, says crowdinvesting has essentially become his second full-time job (he also runs a UPS store in Waipio, Hawaii.) For investors like him, crowdinvesting offers an opportunity—albeit slim—to take a stake in a company that hits it big and delivers lucrative returns. Or, as is unfortunately common in the startup world, nothing.