The Bioscience Crowdfunding Environment: The Bigger Better VC?

« LEK Consulting Report – Beyond the Product: Service Expansion Opportunities for MedTechs

New breast cancer stem cell findings explain how cancer spreads »

The Bioscience Crowdfunding Environment: The Bigger Better VC?

May 14, 2014 by sjwilliamspa

The Bioscience Crowdfunding Environment: Will Crowdfunding be the Bigger, New VC

Reporter: Stephen J. Williams, Ph.D.

Article ID #136: The Bioscience Crowdfunding Environment: The Bigger Better VC?. Published on 5/14/2014

WordCloud Image Produced by Adam Tubman

Pharmaceutical Consulting Consortium International Inc. (PCCI) recently presented their 7^th annual Roundtable “CROWDFUNDING FOR LIFE SCIENCES: A BRIDGE OVER TROUBLED WATERS?”, a panel discussion on how this new funding mechanism applies to early stage life science companies and changes the funding landscape.

A major provision in the recently passed JOBS Act resulted in Securities & Exchange Commission (SEC) rule changes revolutionizing the way companies can raise capital, with some figures in the range of $11 trillion dollars. Companies, startups, and entrepreneurs can, in a manner, now go directly to the individual investor and raise capital. This method is generally referred to as CROWDFUNDING.

As explained by Mark Roderick, moderator for the meeting, there are two main types of approved crowdfunding:

Donation-based Crowdfunding – Popularized by the crowdfunding platform Kickstarter, this method of raising capital can accept small donations from anyone for an idea/project to be completed. The donor may either get a free token of appreciation or access to enjoy the fruits of the project, for example, a watching a movie funded by the donor. Some scientific researchers have used Kickstarter as a method to fund their research.
Investor-based Crowdfunding– This type of crowdfunding involves the actual transfer of securities, and investors must qualify according to rules set by the SEC and go thru brokers, or portals, like the bioscience and healthcare internet portal Poliwogg.

Investor-based crowdfundingwas discussed at the meeting. There are five different mechanisms with this type of funding: Title II (Rule 506c), Title II, Title IV, Existing Regulation A, and Rule 504. The main focus of the meeting was on Title II as, according to Mr. Roderick, involves the mechanism most suited for biotech startups, while rules for Title III still need to be finalized.

Title II crowdfunding requires that “accredited” or “qualified” investors (those who make at least $200,000/year or net worth $1 million US) go through licensed dealer internet nodes (or Portals) like Poliwog. The Portal will have lists of startups they deem legitimate which investors can choose from. For instance the Epilepsy Foundation uses Poliwog to fund certain projects.

The panelists discussed matters including:

How crowdfunding is different than other mechanisms like venture capital
What are the regulations and financial responsibilities for both biotech and crowdfunder
Liabilities
Due-diligence issues

The panelists included:

Mark Roderick, moderator. Mark is an attorney at Flaster/Greenberg PC (@CrowdfundAttny on Twitter) and has developed great experience and expertise in the details of crowdfunding. He maintains a Crowdfunding blog www.crowdfundattny.com, which contains information and links about the JOBS Act and crowdfunding.
Barbara Schiberg, Managing Director at BioAdvance, a Mid-Atlantic bioangel investment community.
Samuel Wertheimer, PhD, CIO Poliwogg, a crowdfunding internet portal.
Darrick Mix, Partner, Duane Morris LLP, corporate lawyer with experience in the JOBS act
Donlon Skerret, PCCI President and CEO of NanoScan Imaging and serial entrepreneur

The Opportunity

Recent estimates place Title II Crowdfunding capacity to $1 Trillion.

Venture Capital (VC) had estimated only $5 Billion bio-investment in 2013.

Where does the rest go?

Mr. Skerret noted that bioangels can only take you so far but thinks that crowdfunding may fill this “valley of death”.

Liabilities

Crowdfunding is SELLING SECURITIESso there is liability, disclosure and nondisclosure issues.

Title II contains 580 pages of regulations and SEC needs a licensed intermediary.

Due-Diligence

Barbara Schiberg also noted that with VCs or bioangels groups you also get s support network, basically their rolodex of contacts and KOL’s and experts. With Crowdfunding like Poliwog they just handle linking investors with entrepreneur. Any contact is done through social media and the crowd.

BioAdvance hires experts – may take months to years to get expert opinion

Poliwog only has responsibility to investor to make sure company is legitimate. They don’t do extensive due diligence like bioangels. Most crowdfunding do not have extensive networks of professionals.

To obtain a video recording of this meeting and get more information please go to PCCI’s web site at http://www.rxpcci.com/meetings.htm.

Other posts on this site related to FUNDING and Bio Investing include: