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Mark Dyne knows a thing or two about investing money in the youngest of tech startups. He was one of the first investors in Skype, the internet communications outfit now owned by Microsoft, and he served on Skype’s original board. Now, he wants to help democratize this kind of startup investment, backing a new company that connects investors with startups via the internet.
The company is called FlashFunders, a Southern California-based outfit that’s also backed by part of Skype’s original legal team. Officially launched today, it’s joining a wide range of other online services that provide a form of equity crowdfunding.
A little more than a year ago, the U.S. Jobs Act made this sort of thing possible, at least with accredited investors. Now, everyone from AngelList to Circleup is offering some sort of online equity-funding marketplace. But Dyne and the FlashFunders founder Vincent Bradley say that FlashFunders breaks some new ground in this area, not only because it’s explicitly rubber-stamped by FINRA, the independent U.S. securities regulator, but because it uses a business model that doesn’t collect fees from either startups or investors. “We want to help create an industry,” Dyne says. “We want more investors to become aware of this.”
What the online world is really waiting for is an entirely new breed of equity crowd-funding service, a service that will allow a much wider range of people—not just accredited investors—to buy a stake in a new company, a kind of Kickstarter that lets funders actually own a stake in a startup. But this won’t arrive until the Securities and Exchange Commission approves a new set of Jobs Act rules, and that may not happen anytime soon. In the meantime, FlashFunders is hoping it can jumpstart online funding in other ways.
In the year since the Jobs Act allowed online equity funding among accredited investors, more than 4,700 funding deals have been made online, according to a report from an outfit called Crowdnetic, and these deals totaled at least $385 million in capital commitments. In the larger scheme of things, says Crowdnetic director of research and data Janet Rosenblum, that’s “not a lot.” But it’s a start. And FlashFunders believes it can help push things much further.
For Gordon Burtch, and assistant professor at the University of Minnesota whose research focusses on crowdfunding, FlashFunders’ claim that it’s the first service to receive specific approval from FINRA may not mean that much. Other services have been approved as broker-dealers by FINRA, just not for online crowdfunding in particular. FINRA could crack down on broker dealers who don’t have specific approval, but that, Burtch says, is mere speculation.
What’s more interesting is the FlashFunders business model. If a startup lists itself on the the company’s service and wins funding, FlashFunders doesn’t charge a fee. But it does reserve the right to invest in the startup at the original valuation price for up to three years. In other words, if the startup takes off, FlashFunders can benefit in a big way. Mark Dyne believes the service will deliver startup funding to a whole new range of investors as well as startups.
Thomas Kellerman—a lawyer in the emerging business and technology practice at the law firm Morgan Lewis, who represents investors as well as companies that seek investment—isn’t so sure. “Most accredited investors have a relative amount of sophistication,” he says. “Most of those people aren’t in need of finding a new place to put their money. I wonder if the dogs will really eat the dog food.” But at the very least, the range of options available to investors is expanding. The long, slow march to equity crowdfunding continues.
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