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Finance & Business Development Crowdfunding And The Life Sciences: Will It Work? By Cliff Mintz, Ph.D., contributing editor failures, and a challenging regulatory environment — has contributed to a scarcity of venture monies available to start-ups and early-stage life sciences companies. "Over the past few years, venture capitalists have primarily invested in later-stage, riskmitigated companies and, as an industry, backed away from funding creative ideas or early-stage companies where they have historically invested," said Steven Burrill, CEO of Burrill & Company, a life sciences venture capital and private equity company. This shift has forced many would-be entrepreneurs and early-stage life sciences companies to consider nontraditional funding options, including crowdfunding, to start up operations or advance drug/device development programs. WHAT IS CROWDFUNDING? With crowdfunding, you use the Internet to donate, loan, or invest money in a new company, idea, or project. It has been popularized by websites such as Kickstarter, Indiegogo, RocketHub, and others that have been successfully used to fund development of software, consumer products, art projects, films, civic efforts, and even political campaigns. Generally speaking, there are two types of crowdfunding: donations/rewards and equity. In the donations/rewards model, pioneered by Kickstarter and Indiegogo, investors either donate money to a project for altruistic reasons (e.g. to develop 50 LifeScienceLeader.com T he past five years have been one of the most difficult periods for raising capital in the life sciences industry. The recession — coupled with longer drug and devices approval times, higher than normal rate of drug a treatment to cure a disease) or because they receive a reward (t-shirt, early access to a product, product discounts, etc.) in exchange for their investment. In contrast, in the equity crowdsourcing model, contributors receive an ownership interest or shareholder stake in a business/ entity collecting the funds. Because of this, the investment is considered a "security" under federal and state laws and is regulated by the U.S. Securities and Exchange Commission (SEC). While donation/rewards crowdfunding has been in existence for the past several years, equity crowdfunding was not possible until April 2012 when the JOBS Act (Jumpstart Our Business Startups Act) was signed into law. The JOBS Act contains a provision for equity crowdfunding (Capital Raising Online While Deterring Fraud and Unethical NonDisclosure Act or CROWDFUND Act), which allows companies to raise capital in small amounts from large groups of people using the Internet and social media. Equity crowdsourcing is not widespread because the SEC is still working out the regulations for its implementation. However, equity crowdfunding experts believe the aggregate amount sold to equity investors through an investment-based portal (approved by the SEC) in any 12-month period may not exceed $1 million. Also, it is likely that individual investors will have monetary caps placed on their equity investments made through these investment portals. November 2013 HOW CROWDFUNDING WORKS Like traditional fundraising, companies or individuals seeking financing craft a "pitch," an executive summary that describes why the funding is necessary and what the funds will be used for. The pitch (and other supplementary information) is published on a crowdfunding portal along with a financial goal. For example, a company may be seeking $1 million for new product development. Typically, companies or individuals are required to reach their funding goal, or investors get their money back. The portal hosting the campaigns keeps a percentage of what is invested or donated — usually 7 to 20 percent. Sometimes a flat fee is charged. The reason why crowdfunding appeals to many would-be investors is the amount of transparency associated with fundraising campaigns. In most instances, the progress of the campaigns (and expected company milestones) is prominently displayed on the portal and easily accessible to both investors and donors. Also, because individual investors usually do not invest substantial sums of money, the amount of risk involved in financing crowdfunded campaigns is generally very low. At present, there are eight crowdfunding portals operating in the U.S. (table 1 on page 52). Of these, five are donations/rewards portals, and the remaining three platforms are based on the equity-based financing model.