TechCrunch 50 startup Sprowtt has a radical, yet potentially compelling idea launching today—the startup lets ordinary startups and small businesses conduct a “Sprowtt IPO,” which is basically similar to the traditional IPO process.
Via Sprowtt, anyone can participate in the funding of companies. Potential investors log on to the site, set up a profile with detailed financial and bank account information. Then they are given a list of companies they can invest in based on their financial capabilities. Investors can check out videos of startups, the amount of money the startup has already raised, and their products and see detailed business plans, on which investors can share their comments. Potential investors can also access the offering circulars and shareholder agreements for the startup.
Once an investor decides to put money into a company, he signs the stock subscription agreement, enters the number of shares he wishes to purchase and then the funds are held in escrow until the offering is complete, which happens when the minimum amount for an offering is accumulated. Sprowtt helps to transfer the funds from an investor’s account to the startup.
The Sprowtt platform automates the entire stock offering process, including legal compliance in all states and with the SEC and draws up all of the legal documents (i.e. the shareholder agreement, offering circular) for the startups participating in the marketplace. But it’s not cheap for a startup to do this—Sprowtt says that if a company wants to sell $5 million worth of stock, it will cost them roughly $10,000-$25,000 in compliance fees to IPO.
When there are enough investors for a startup’s IPO, Sprowtt forms a company with these investors, and then invests the chunk of money as an entity instead of as individual investments . Also in the traditional IPO process, a company’s shares go on an exchange, like the Nasdaq, where they can be bought or sold. With Sprowtt’s IPO, there is no exchange, so it’s more of a private investment than an actual IPO.
Expert Panel Q&A (paraphrased)
The experts: Satish Dharmaraj, Lior Zorea, Bradley Horowitz, Tim O’Reilly, Kevin Rose
BH: These companies are all subject to the same restrictions in any other marketplace?
A: We’ve consulted with law firms, they crafted business model, everything is dealt with SEC and Federal government. It’s complex.
BH: Do you vet companies?
A: Yes, we do.
TO: I’m confused. This doesn’t change stock and compliance. Once you are public, you incur those costs.
A: The automation helps with this.
TO: Read Eric Ries’ blog to vet businesses.
SD: When someone buys shares, do they get dividends.
A: It’s all freely tradeable stock. Sort of an alternate to Nasdaq.
KR: How do you plan on attracted companies that aren’t oversubscribed?
A: It’s a big question for us-how to we keep best deals there. But this is a compelling model.
Jason: Which law firm has vetted this?
A: Working with legal counsel. We have had legal counsel in Silicon Valley that has a presence in DC with the SEC. There are things that the law firm will put their stamp on and some that they don’t.
LZ: I think IPOs are on their way back. It’s an interesting idea that other folks have looked at it. Based on my practice, I’m skeptical of this. Securities laws were put in place to protect the folks that didn’t have the means to lose their investments. There are difficult challenges in the securities side.