I’m pretty sure Amy Wan is one of the busiest people in investment crowdfunding, so I was thrilled she was willing to take some time in the middle of launching her startup, Bootstrap Legal, to answer our questions (Bootstrap uses AI to automate the drafting of legal paperwork for real estate private equity, syndication, and crowdfunding deals — Amy is founder and CEO). Previously, she was a Partner at Crowdfunding Lawyers and General Counsel at Patch of Land. Amy is also the founder and co-organizer of Legal Hackers LA, which programs around the intersection of law and technology.
YieldTalk: Crowdfunding is inextricably tied up with technology as a fundamental enabler of the entire ecosystem, especially ecommerce, the web, and social media. Yet really critical parts of the industry — specifically around legal document preparation and review—remain firmly in the era of word processors and PDF files. Do you see technologies like artificial intelligence (AI) or distributed blockchains making an impact anytime soon?
Amy Wan: You’re right. I often joke that the most significant changes to the practice of law in the past 200 years has been MS Word, Google, and email. I think there are going to be a lot of changes in the coming years with how legal documents are prepared and reviewed. There are a number of legal technology companies now that are looking at applications of AI into the legal sector—my startup, Bootstrap Legal, is one of them. As a private practice attorney, I noticed that there was a huge gap in accessibility to legal services. The laws require that you use certain legal paperwork when raising money, but for the entrepreneur who didn’t have a trust fund or roll with the socio-economically elite, paying for that legal paperwork seemed to be near impossible. So, we’re applying AI to the drafting of legal paperwork for those who are looking to raise capital—specifically for those trying to get their start in real estate.
Blockchain is also a hot topic right now. I get several LinkedIn messages every week about initial coin offerings (ICOs). I can see how blockchain technology will be able to significantly enhance trading and the secondary markets.
YieldTalk: You recently — and quite publicly— shared details about your personal crowdfunding portfolio. What has been the response? Do you have any advice for someone new to investment crowdfunding as they explore the ecosystem?
Amy Wan: Well, I think some of the companies I invested in and platforms I invested on appreciated the publicity ? I also keep getting inquiries asking for investment advice. To be clear, people should not invest in what I’ve invested in. Every person has a different financial situation and different risk tolerance. Plus, part of crowdfunding is about investing in things you’re passionate about. I’m passionate about food. Hence, a lot of my investments are in restaurants, despite the fact that I know that they generally make terrible investments.
It’s taken me awhile to learn about finance and investments. I would encourage all investors to take the time to educate themselves on the fundamentals of finance first, and to figure out their level of risk tolerance. People should not be investing their life savings in crowdfunding investments, but rather, should only invest what they can afford to lose. But then again, that goes for all investments, crowdfunding or not.
The one thing I look for across all investments is the management team. It doesn’t matter whether it’s real estate or startups or restaurant—you want to go with a team of people that you think has the hustle to get things done, but also the aptitude to execute, figure things out, and make smart decisions.
YT: There was recent news about the SEC looking into (though explicitly not investigating) Rich Uncles related to one of their offerings. What do you think the SEC is considering at when deciding which offerings to look more closely at?
Amy Wan: The official word is that they’re investigating the “advertising and sale of securities by us in connection with the offering.” I don’t know much beyond that. We’ll have to wait and see what comes of it. I don’t follow Rich Uncles closely enough to comment.
YT: I’m neither a lawyer or a legislator, but as an outsider the crowdfunding rules and regulations seem like quite a patchwork. That stands out quite a bit when looking at side-by-side offerings, where for example investors participating via Reg CF receive direct equity and can expect annual reports, while those investing in the same company via Reg D will likely end up in an SPV with no reporting at all.
Amy Wan: Well, laws and regulations could probably be described as “patchwork” in the U.S. It takes a lot of people a lot of negotiation and compromising to come up with what is and isn’t allowed. It may seem beneficial for investors to get annual reports and direct equity, but you also have to look at the other side of the coin—this means that the company also has to make highly valuable financial information open to the public, including to competitors, and has to spend money (specifically, your money) on all the extra legal paperwork it takes deal with direct equity investors. Imagine having 500 direct equity investors and trying to get your shareholders to vote or bless certain company actions. What a time-consuming and costly nightmare.
I’m actually highly in favor of SPVs for Reg CF offerings. If you think about it, valuable companies tend to want to keep their information close to the chest, and thus would choose not to raise money under Reg CF, which leaves investors with an adverse selection problem—the best companies will still choose to raise funds from accredited investors under Reg D, and the not-so-companies will try to raise funds from the crowd.
It’s very difficult to balance investor protection with capital formation. I don’t think we’ve found a good balance yet.
YT: While many platforms talk about individual investors, there’s clear interest from institutional, especially in debt. What role do you see for the individual investor in the long term?
I don’t think the two are mutually exclusive. If a business has a successful crowdfunding raise from institutional investors, perhaps that will allow them to qualify for a loan they wouldn’t otherwise be able to get, or get a larger loan than they otherwise could get.
YT: Reg CF is just over a year old, what grade would you give it?
Amy Wan: Maybe a C-? It’s not for lack of trying. It’s a new industry, and there is a lot of room for improvement. It hasn’t blown up yet, but I don’t think anyone expected it would. The regulations are too cumbersome right now to really let it take off. At the same time, I’ve seen some great deals and some terrible deals. But I’m a hard grader. It’d be difficult to ever get an A in a class I teach ?
YT: Reg CF opened up a lot of new and interesting investment opportunities to everyone, with many platforms offering investments for as low as $50. Yet very few members of the general public have any idea about it. What do you think can be done to improve awareness?
Amy Wan: Well that’s the billion dollar question. It’s going to take time. Half the battle is awareness, and the other half is education. Many platforms are trying to figure out the answer to this very question right now. Republic just announced a cable TV show with the Drapers to get more publicity. There also needs to be a company with a good exit. But I don’t know. If I knew, I’d implement that idea and be rich, haha.
YT: On the flipside, while it’s exciting that a lot of new kinds of investors can join in, these are nothing like stocks or mutual funds that most people are familiar with. What advice would you have for someone new to alternative investments when looking at investment crowdfunding offerings?
Amy Wan: These investments are largely illiquid. That means if some unforeseen event happens in your personal life—a wedding, a funeral, a medical emergency—you can’t just sell your stock on a public market. So, if you do invest, you need to do so with an attitude that you cannot go and sell the stock or investment whenever you want.
YT: Among the large Reg CF platforms, there seems to be two main camps: on the one hand, there’s platforms like Wefunder that essentially allow any company to post an offering (beyond doing the required background checks and anti-fraud checks). On the other hand, platforms like SeedInvest emphasize their curatorial role in choosing which companies to allow on their platform. Do you think one or the other approach will ultimately “win”?
Amy Wan: That’s another “if I knew I’d be rich” question. Curation works well for folks who are looking at crowdfunding as primarily an investment opportunity. It probably works better in certain verticals, like tech startups or real estate. At the same time, I can see the appeal of the latter approach—it lets the crowd decide. If the Kickstarter crowd didn’t “decide” that my neighbor needed an independent ice cream shop a couple years ago, I wouldn’t have the pleasure of spending way too of money at Long Beach Creamery today.
I’ll tell you what I do believe in though—I believe that the local, community brick and mortar investment opportunities will be a winner. I’d love to be able to invest more often in my neighborhood and help bring into existence local shops that I’d like to personally frequent. And if I’m invested, I’d be bring friends over for brunch or dinner at that place all the time. And if the food wasn’t good, I’d be more inclined to honestly tell the chef so. Because as an investor and community member, you’re invested in what you want to see.
YT: It’s obviously still early days, but two of the biggest clusters of investment crowdfunding sites are in Real Estate and Startup/Angel. In both categories, I’ve repeatedly heard incumbents dismiss crowdfunding offerings as “not good enough” for the traditional and incumbent funding sources. How would you respond to a wary investor who’s hearing that?
Amy Wan: Well, in real estate, there are always going to be areas that traditional funding sources are more reluctant to touch. Banks generally don’t lend on fix-and-flip loans, and institutions generally regard their transaction amount to be too nominal, for example. With startups, VCs have generally underfunded companies who don’t fit the traditional mold—women-founder, minority-founded, and social impact companies, for example. The other thing to note is that institutional and crowd money aren’t mutually exclusive. We’re entering a brave new world.
YT: You’ve written about Initial Coin Offerings from the perspective of the offerer (and in particular the likelihood their offering will in fact be considered a security). What should a potential buyer know before participating in one?
Amy Wan: Know that in many cases, you’re still buying a security. And if the issuer isn’t complying with securities regulations, it leaves them open to risk of investor lawsuits and regulatory enforcement action.
The last kernel of knowledge on ICOs is by Warren Buffett: “Be fearful when others are greedy.”
My sincere thanks to Bootstrap Legal Founder and CEO Amy Wan for taking the time to answer our questions about investment crowdfunding. Want to learn more but aren’t sure where to start? Explore more than 80 investment crowdfunding websites and online alternative investment platforms in our database.