Getting a slice of a virtual reality or e-commerce start-up has been limited to people with real money--accredited investors.
But as of Friday, a new Securities and Exchange Commission rule enables companies like Virtuix, which makes a suite of VR products, to raise capital from the Main Street crowd.
It's the latest piece of the 2012 Jumpstart Our Business Startups (JOBS) Act to be enacted, and the purpose is to open new sources of capital to small businesses. The rule, officially called Title IV, will lead to a "mini-IPO" market, some experts say.
"This is going to be a viable solution for a lot of the fastest growing consumer-facing companies before an IPO," said Ryan Feit, CEO and co-founder of SeedInvest, an equity crowdfunding site that's helping businesses such as Virtuix raise money. "A lot of companies we've spoken to are interested in the ability to reward their loyal customers, letting them get in on the ground floor."
Buyer beware though. This stuff is super risky.
Any early-stage bet is unlikely to pan out, but at least with traditional start-up investing, the money comes from institutions or individuals with plenty of spare change.
For those less well-endowed, this isn't like buying Apple or GE in a brokerage account, because there's no secondary market for selling shares. Getting your money back and certainly making a profit will require some sort of liquidity event, like an acquisition or IPO.
"We always tell first-time investors, `Never plan on flipping shares,'" said Feit.
Nonetheless, Virtuix is excited to open up equity to its customers.
The Austin, Texas-based company makes a line of VR products under the Omni brand for a full-on virtual experience. For $699, consumers get a moving pod (looks like a 360-degree treadmill for gamers), a safety harness, a special pair of shoes and some other features. External headsets like those made by Oculus are required.
Virtuix started with a $1.1 million Kickstarter campaign in 2013, offering contributors gifts ranging from posters to product prototypes.
The company then raised $3 million on SeedInvest from a group of traditional investors, including billionaire Mark Cuban, and has now raised a total of $8 million. With Title IV in place, Virtuix is planning an equity crowdfunding campaign for later this year or early next, though the company hasn't determined the amount.
"We can, in essence, go back to our community that backed us on Kickstarter and say `Now you can be an investor in the company,'" said Jan Goetgeluk, founder and CEO of Virtuix. "We can truly turn those followers into brand advocates."
The new SEC rule could be particularly beneficial for companies that are outside of tech or far away from the big tech hubs, and thus lack connections in the venture capital world.
This doesn't mean that just any fledgling brand will be able to suddenly reel in cash. To comply with the SEC rules, companies raising up to $20 million must have their financials reviewed by an accountant, and those raising $20 million to $50 million must have their financials audited. Additionally, companies have to be prepared to promote the offering. That all costs money.
And any purchases have to be made through a broker-dealer, which is where platforms like SeedInvest come into play.
SeedInvest, which to date has helped businesses crowd fund from accredited investors, accepts only about 1 percent of applicants.
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SeedInvest and BankRoll vet investors to try to limit irresponsible behavior. For companies raising $20 million to $50 million, the rules limit investment to 10 percent of an investor's annual income or net worth, whichever is greater.
But the platforms aren't required to verify stated income, so "if someone wants to lie, they can lie," said Feit.
Investors could also plop down 10 percent of their income in a start-up on one site and another 10 percent elsewhere, with no external protection. Regulators can do little to protect retail investors from themselves.
There's one thing about the new rule that Feit and Almerico are equally excited about. It's called "testing the waters," and will allow companies to gauge interest in a share sale by inviting people to view their profile and financials before deciding to go through with an offering.
A specialized e-commerce company called StarShop will be taking that approach on BankRoll.
"Before you go out and start the mini-IPO and spend money on attorneys and accountants and broker-dealers, you can go out and test the water and get feedback," said Almerico, who's based in Alexandria, Virginia. "It's a revolutionary part of the law that no one's been able to do before."