Stratifund Aggregates & Rates Equity Crowdfunding Deals
Published on May 6, 2016
Experienced securities professionals developed an algorithm that rates offerings under Title III (Reg CF) and Title IV (Reg A+)
By David M. Freedman
¶ If you want to exercise your new right to invest in innovative startups and growing small businesses, where will you start — which funding portals will you visit to find the best offerings of private securities? For many people who have little or no experience evaluating angel investment opportunities, the best place to start is a website like Stratifund, which aggregates offerings from various crowdfunding portals into one list, makes them searchable and sortable, and rates each offering according to five criteria.
No doubt a number of deal aggregation sites will appear in the next few months, some of them also evaluating or rating deals, as Title III crowdfunding launches and Title IV crowdfunding grows. I chose to profile Minneapolis-based Stratifund first because it gets good recommendations from crowdfunding professionals with whom I’ve spoken, and its management team (bios below) has the expertise needed to create an algorithm capable of rating offerings as objectively and reliably as possible.
Both Title III and Title IV issuers must file notices with the SEC before listing their securities on a crowdfunding platform, so there is much data and offering information (e.g., business plans, financial statements, etc.) available to the public, and that’s what Stratifund uses in its reports and ratings. It does not have contact with the issuer, as such a relationship might generate subjective information and produce biased ratings. The rating algorithm uses metrics in the following five categories, according to Stratifund cofounder Alex Thaler:
- Team members: their business experience, training and capabilities, incentives built into the offering, and other considerations. (The details in this list are not comprehensive, but represent just some of the considerations that the team includes.)
- Industry: whether it is thriving, growing, being disrupted, highly regulated, etc.
- Competitive environment: whether there are formidable competitors, and if so, whether they represent obstacles. “Is the issuer up against Amazon or the corner store?”
- Differentiation: Are the claimed competitive advantages truly different and better, or just a copy of existing products or business models?
- Financials: evaluation of current and projected sales and costs, cash flow, profit margins, key ratios and how they compare with industry standards or averages; and the deal structure and how it compares with norms in the private securities market.
Thaler points out that Stratifund does not conduct legal due diligence on the offerings. For example, it does not do background checks on officers to determine whether any of them are “bad actors,” which would disqualify them from participating in a crowdfunding offering. (Intermediaries — the funding portals and broker-dealer platforms that list the offerings, connect investors with issuers, process the investment transaction — must conduct background checks. But investors are still advised to conduct their own due diligence and shouldn’t always rely on the intermediary to do so.)
Stratifund developed its rating algorithm over several months, back-tested it using actual startup companies (comparing their business plans with their eventual success or failure, for example), and verified the algorithm’s effectiveness in predicting which startups would succeed. Stratifund has not yet rated Title III offerings, of course, because Title III won’t launch until later this month. Stratifund will continue to develop and reiterate the algorithm based on changes in the law and the marketplace, but neither Stratifund nor anyone else can guarantee that its rating system will always be reliable for all offerings. The Stratifund rating is one of many factors that investors should take into consideration before making an investment decision. Nevertheless, I maintain that it is a good place to start for inexperienced angel investors.
Stratifund does not need issuers’ consent to feature and rate their offerings, because the offering information is in the public domain, as noted above. What if an issuer objects to Stratifund’s rating of its offering? “We do expect to get some pushback from issuers,” says Thaler. But he will not adjust a rating based solely on an issuer’s disappointment. “The only time we will update a rating is in the case of a material factual error. In that case, we will review and make any changes as necessary.”
Regulation A+ Offerings Today
Stratifund launched in April 2016. At this point, a week before the launch of equity crowdfunding under Title III of the JOBS Act of 2012, Stratifund aggregates and rates six live Reg A+ offerings (not merely “testing the waters”) under Title IV, also known as Regulation A+. Title IV offerings are called “mini-IPOs” because issuers must go through a scaled-down registration and approval process with the SEC before they can be listed on a crowdfunding platform.
You can visit the Stratifund site to see what the reports and ratings look like. On May 6, 2016, half the offerings had ratings of 3.5 on a 5.0 scale, one offering got a 3.0 rating, and two earned just 2.0. These Reg A+ offerings were in a nice variety of industries: transportation (in Colorado), media & entertainment (California), consumer products (California), technology (Texas), health & fitness (New York), and services (Virginia). The offerings originated on three different crowdfunding platforms: SeedInvest, StartEngine, and WR Hambrecht.
Regulation CF Offerings Soon
Thaler expects that there will be 20 to 200 Title III offerings on crowdfunding portals on “day one,” which is May 16. The Stratifund team can review and report on new offerings fairly quickly. “We do not anticipate a lengthy backlog to complete the day-one deals,” Thaler says. The only kind of deal that Stratifund will not review is real estate. If at any point the volume of new offerings becomes overwhelming, Stratifund will “prioritize based on the number of ‘likes and follows’ for each offering,” which indicate investor interest, and may also focus on a limited number of selected platforms if necessary.
The Stratifund Founders
Before joining the Stratifund founding team, Alex Thaler worked for Boston Consulting Group, where he developed acceleration strategies for clients. He also participated in the launch of a novel primary care clinic concept within a health club. Thaler holds an MBA from the Wharton School, University of Pennsylvania, and a master’s degree in engineering design and innovation from Northwestern.
Cofounder Marc Snover has experience in business valuation and due diligence research in the fields of investment banking and corporate development; he also worked as a research analyst covering both the buy side and sell side of transactions, and his background includes financial securities regulation as a broker-dealer auditor.
Jeff Julkowski has founded, operated, and successfully exited a variety of businesses—most recently Chamilia, a consumer jewelry7 business acquired by Swarovski in 2013. He was named an Ernst & Young Entrepreneur of the Year in 2011. Julkowski previously spend seven years as an equity analyst at Morgan Stanely and Salomon SmithBarney/Citygroup.
Jeff Yurecko has served as CFO or early-stage businesses, and spent eight years as a management consultant advising private equity and corporate clients with M&A due diligence. He also spent several years as a financial statement auditor with a Big 4 accounting firm.
Dean Banks, the last cofounder, is an executive at Google X; and previously worked as CEO of Vergent Bioscience, VP at Highland Capital Partners, and Sr. VP at Tornier; and exective positions in other early- and growth-stage medical technology and health care companies.
David M. Freedman has worked as a financial and legal journalist since 1978. He is coauthor of Equity Crowdfunding for Investors: a Guide to Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms, published by Wiley & Sons in 2015.
Categories: Portals & Platforms