Joanna Schwartz is in typical startup mode, her days (and many nights) filled with calls and meetings with investors and entrepreneurs and strategy sessions with her team of 12 as they prepare fund-raising campaigns for growth companies and real estate ventures. She is the CEO of EarlyShares, a portal for equity “crowdfunding” with more than a dozen active campaigns in progress and more in the pipeline.
“There is so much going on, our heads are spinning every day, but it is all in such a good way,” said Schwartz, who has founded and/or led companies in a variety of industries.
First, a bit of history: Incorporated in 2011 in Miami, EarlyShares was built to be a crowdfunding company. In April of 2012, the JOBS Act was signed that legalized the concept of crowdfunding although the regulations would still need to be put in place. The company went full force into education, brand-building and putting the building blocks in place for what the company was to be.
Schwartz joined the company in early 2013. At that point, the Securities and Exchange Commission still had not released the final regulations, known as Title III, that would allow companies to offer equity stakes in their companies to lots of ordinary investors. But in September of 2013, the SEC released a set of regulations, referred to as Title II, that allowed the advertising of deals, opening the door to crowdfunding for sophisticated, so-called “accredited” investors.
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By year’s end, EarlyShares opened its platform to accredited investors and began offering them direct access to private opportunities.
Here’s how it works: EarlyShares first puts the company raising money through due diligence. Once vetted, EarlyShares helps the company set up the campaign and handles the administration and documentation, and assists with marketing. Companies get a dashboard to monitor and manage the campaign, saving time and eliminating back-and-forth emails with potential investors.
Visitors to EarlyShares.com see minimal information about the deals, such as how much the company wants to raise, minimum investment and some basic facts about the company and management team. Accredited investors interested in a deal must request an invitation to see the full deal details, including the business plan and financials. Investors also are vetted, and the companies seeking funding decide whether to grant access; they can also turn down an accredited investor at any point in the process.
As for the status of equity crowdfunding for non-accredited investors, the proposed Title III rules were published and the comment period ended earlier this year. Many entrepreneurs and startup companies said the restrictions, as written, would actually deter smaller companies from crowdfunding. The New York Times called the new rules “a joke.” EarlyShares, for its part, submitted a seven-page response to the SEC. These came as regulators tried to make it easier for small, privately held firms to raise capital from the public while ensuring investors are protected against fraud and other risks.
Crowdfunding analysts and market watchers have speculated that regulators could release the rules by the end of this year. In the meantime, more than a dozen states have passed laws allowing equity intrastate crowdfunding, where both the project and the investors are in the same state. A proposed bill was floated in Florida this past session, but it did not advance.
Schwartz said the platform is fully ready for Title III deals but if EarlyShares is not happy with the final rules when issued, the company will remain a platform for accredited investors.
“We’re good. We like to say we are Title III agnostic. This is too good of an opportunity we are sitting on, we are really early in the growth cycle of this,” Schwartz said. “We’re in the first hit of the first inning of the first game of the season. If you think about it, 80 years of regulation has been undone only two quarters ago. Granted we are in an age of super fast adoption, but private capital raising is a $2 trillion industry.”
The first seven months as a fully functioning platform have been a learning experience for the young company. Said Schwartz: “We’re changing the old ways of doing things, and taking root and growing is going to take a little while.”
The Miami Herald talked to Schwartz recently at EarlyShares’ Brickell offices about the company, crowdfunding and the status of the regulations.
Q. You've had a diverse career, with leadership roles in companies ranging from commercial mortgage firms to steel products. What attracted you to EarlyShares?
A. When EarlyShares Chairman Steve Temes approached me in early 2013, I was at the perfect place in my career to lead and grow a company that I was passionate about. I had already learned about the JOBS Act and knew it would fundamentally change the way private companies raise money. I was compelled by EarlyShares’ mission to help entrepreneurs and investors to capitalize on the changing regulations and I felt that my experiences, particularly at Silver Hill, were well suited to take on the challenge. I’m excited every day about growing this company to make a positive impact on the business community and our economy.
Q. What stage is EarlyShares in now?
A. We are all about scaling and growing the business because all the building blocks are in place. ... Our vision is to be a one stop shop for private opportunities of very high quality that are vetted and supported by project sponsors of the highest caliber. We are committed to this market and we are here to stay.
Q. You’ve recently started to post real estate deals on EarlyShares? Why real estate?
A. There are almost 9 million accredited investors in the United States. Up until recently, less than 3 percent had ever invested in a private investment opportunity. It’s not that they didn’t want to, they didn’t have access to them unless they knew someone, and this is especially true in real estate. It really is about giving direct access to investors in ways they never have before. What were your options before? You could buy shares in a REIT. While that is interesting intellectually, it’s not that fun. This is much more fun and more direct. ... Where else can investors go with a few clicks and get a potentially 7 or 9 percent return on a project that they understand? We’re not saying it’s riskless, nothing is riskless, but they get it because real estate is intuitively understood in a much different way than startup companies are. Investors are chasing yield.
Q. What do you look for in a potential campaign for EarlyShares?
A. EarlyShares is focused on two verticals right now: growth-stage companies and real estate. The selection criteria for an offering differ depending on the vertical, but we apply stringent vetting and review standards to both types of offerings. Ultimately we’re seeking quality opportunities with clear potential for returns, so we look for deals with traction, existing investors, experienced founders and evidence of past successes.
Q. Tell me about a couple of your campaigns in progress.
A. To name just a few, Steel Wool Entertainment, a talent management and production firm, already has Grammy Award-winning musicians and breakout YouTube artists under management. CEO Kevin Morrow was formerly a senior leader at House of Blues/Live Nation.
PsychSignal, a financial market data provider, counts several prolific hedge funds among its clients. CEO James Crane-Baker is a former Wall Street trader and serial entrepreneur with a major acquisition under his belt.
Kleo is the Miami-based parent company of ClassWallet.com, an e-wallet solution for schools and classrooms. CEO James Rosenberg is the founder of AdoptAClassroom.org, which has raised $25 million for classrooms across the U.S.
And the Beacon Hill real estate project is sponsored by Rivergate Partners, a Miami-based firm with 30 years of executive leadership in the multi-family market.
Q. Crowdfunding has certainly attracted a crowd of competitors. What’s it like working in such a competitive space?
A. There are group of competitors that are really solid that I love because they are helping to build the industry. It’s fantastic. Beyond them, there are a lot that are not doing it to the level that it needs to be done. There will be consolidation in the industry, no question. That’s not our path.
Q. I’m giving you the crystal ball. What do you think is going to happen with the final crowdfunding rules and how will it potentially impact EarlyShares, or not?
A. That’s hard to say right now. I came to EarlyShares with a lot of enthusiasm for Title III, but we’ve shifted our focus entirely to Title II. Title II (which allows general solicitation) not only gives entrepreneurs a valuable new way to raise capital, it poses huge opportunities for accredited investors. Individual investors were largely barred from participating in the private finance market for 80 years under U.S. securities laws. The ability for them to now find and fund private deals is unprecedented and is opening up exciting new avenues for high-potential investments.
Title III could be completely transformative if it’s implemented the right way by the SEC — and EarlyShares would welcome the opportunity to bring more individuals into the private investing community — but the initial rules have too many challenges as proposed. I don’t foresee the SEC implementing Title III within the next few months, but EarlyShares will only offer Title III opportunities if the rules are modified to be more advantageous for investors and issuers.
Q. On the rules that have been published for comments, what was one aspect you liked and one aspect you didn’t?
A. There were several things we liked, including that the rules permitted issuers and platforms like EarlyShares to rely on individual investors’ own representations of their income or net worth, rather than require a costly verification process. Among the things we didn’t like are the proposed financial disclosure and reporting requirements imposed on issuers. Without getting too technical, the requirements would place such staggeringly high costs on issuers that we believe they’d deter the vast majority of issuers from utilizing the Title III exemption at all.
Q. What have you learned so far with EarlyShares?
A. Recognizing that this is an investor-driven business, and that success is driven by finding, sourcing, selecting and vetting the deals investors are looking for. Finding deals is the easier part of the puzzle; we spend a lot of time educating investors and entrepreneurs. We take on that role of guidance. We are not an investment bank, we are not their lawyer, their accountant. We are a platform. We can provide them to the connections if they need them.
Q. What's next for EarlyShares?
A. EarlyShares’ recent expansion into real estate has proven extremely popular with our investors because these deals offer them cash flow, returns and appealing investment horizons. We look forward to growing our roster of active, quality commercial real estate deals and announcing some strong new partnerships in that vertical.
Q. I understand you are also an angel investor. What kinds of companies do you invest in and what do you look for in potential investments?
A. I look for the kinds of early-stage investment opportunities that would meet EarlyShares’ eligibility criteria: companies with strong leadership, unique value propositions, large markets for their products and services, existing contracts, realistic financial projections, and exit strategies. In many cases, the most challenging aspect of angel investing is learning about quality deals and then evaluating them properly — which is why I’m so committed to making EarlyShares a source that simplifies the process for identifying unique and vetted investment opportunities.
Q. What are your thoughts on the emerging local startup ecosystem?
A. Our tech-entrepreneurship community is at such an exciting place in its evolution because we’re all rooting for one another’s success. Every early-stage company that receives investor funding drives more and stronger investor interest in other ventures in the region. As a portal for private investing into early-stage companies, we at EarlyShares are doing our best to play a central role in helping grow and strengthen this community.
Follow Nancy Dahlberg on Twitter @ndahlberg.