“Crowdfunded” IPOs Offer Alternative to “Insider” IPOs

When was the last time you got in on a hot tech IPO?

For me, the answer to that question is… never.

The recent IPO of Twilio (NYSE: TWLO) is a good example.

Twilio is a fast-growing “cloud communications” company. It offers cutting-edge ways for companies to communicate with their customers (app notifications, text messages, etc.).

The company’s revenue grew an impressive 88% in 2015, for a total of $166 million.

Twilio IPO’d in June at $15 a share.

But by the time most of us got a chance to buy Twilio, it was already trading north of $25. And by August 15 , shares had run all the way to $58!

The current IPO process doesn’t serve average investors well. It favors investment bankers and their top clients, who usually capture a lion’s share of the profits.

And as you can see in the chart below, IPOs of firms with less than $50 million in revenue have plummeted in recent years.

ei_us-ipos
Source: Harvard Law School

So it clearly doesn’t work well for small companies either. Today tech companies stay private for as long as possible, which is a big problem if you like investing in high-growth companies. (More on that here.)

Fortunately, things are starting to change.

I believe we’re at the beginning of a major change in early-stage capital formation. One that offers small companies better ways to fund their businesses’ growth and creates new ways for investors to tap into high-growth equities.

This could be the best thing to happen to individual investors in decades.

Regulation A+ “Crowdfunded” IPOs

We write a lot about the JOBS Act and how it has opened up early-stage investment opportunities to all.

But there’s another aspect we haven’t talked about as much.

The JOBS Act also created a new path to IPO. One that could level the playing field for individual investors.

By utilizing Regulation A+, companies can now raise up to $50 million from thousands of investors. They can then opt to have shares trade on the Nasdaq, OTC or other exchanges.

Earlier this year, Elio Motors became the first company to “crowdfund” its IPO using Reg A+. (See my past articles on Elio here and here.)

It raised more than $16 million from thousands of individuals, and today shares trade on the OTC market under the ticker ELIO. (Note: it’s a highly speculative stock that trades on very low volume.)

Using Reg A+ is a radically different way to take a company public.

Following Elio’s successful transition from equity crowdfunding to IPO, I’m keeping an eye on the next companies to utilize this new fundraising process.

Investment firm WR Hambrecht (which helped underwrite Elio’s offering) has another Reg A+ IPO in the works. The company is called ShiftPixy.

ShiftP ixy is a marketplace for the “gig economy.” It’s a play on the growing trend of on-demand employment. (Think Uber and similar providers.) You can learn more about ShiftPixy, and these types of offerings in general, on WR Hambrecht’s site.

Closing Thoughts

Most investors have been left out of the juiciest equity gains in recent years.

With the rise of equity crowdfunding, investors now have two important new types of opportunities:

  • To invest in small private companies (and capture potentially massive returns)
  • To participate directly in smaller IPOs.

We’re keeping a close eye on these new markets as they develop. Stay tuned for some exciting developments in the next few months.

Good investing,

Adam Sharp
Founder, Early Investing