This post by John Nettles originally appeared on the Louisiana Technology Park blog.
The Title III equity crowd funding rules went into effect recently, and many entrepreneurs, funders, and financial analysts are wondering if “retail investing” is all it’s cracked up to be.
While Title III theoretically opens the floodgates to literally billions of additional investments there’s a downside as well. If you’re completely green to Title III, here are some potential drawbacks to keep in mind:
Loss of Investor Partnership
Most investors are more than piggy banks. In many cases, investors act as both partners as well as navigators of local entrepreneurial ecosystems. The investors make connections, give advice, and, sometimes, help secure additional funding.
Often times, this type of support is necessary for healthy deals. But under the crowdfunding model, it’s uncertain if this type of support will be present, where it will come from, or how expensive it will be.
Investors are more than backers – they need to be managed. And the more investors, the messier the cap table and the more difficult management becomes.
This holds true for all parts of the process. In the pre-funding phase, these crowdsourced investors will want to know how the money is being spent. In the post-investment phase, buy-in will be required from the investors for decision making in many cases. And up until the investors exit, they will need to be communicated with on an ongoing basis about what is happening with your company.