May 15, 2012
Following President Obama’s signing of the JOBS Act, startups are now waiting for the SEC to finalize crowdfunding regulations. But what if crowdfunding – of a sort – were already possible?
The JOBS Act’s equity-based crowdfunding goes beyond the crowdfunding available on sites like Kickstarter, because investors can actually make a profit – not just receive a gift or pre-order a product. But SoKap, a new startup out of Canada, offers a happy medium.
Instead of buying equity in a startup, SoKap investors buy the rights to its profits in a particular city. For example, if I had bought the rights to Zynga in San Francisco, I would be collecting money from all the in-app purchases of San Francisco Facebook users. On SoKap, startups can set different prices for different cities and (obviously) choose to keep some cities’ profits to themselves.
SoKap is legal because it falls under a “business opportunity” license, rather than an investment – think of it like those door-to-door Avon sellers. Because no equity changes hands, contributors can expect a profit even if the startup doesn’t sell or go public, and that profit is fairly predictable: say, the cost of the product or app multiplied by the number of expected buyers in your city. Although startups on SoKap may earn lower profits initially, they can own their entire business and don’t need to do a valuation (the latter, however, is also the case with convertible debt).
Because of this structure, SoKap is designed for active investors: people who are interested in the product, maybe have a marketing background, and want to help promote and advertise it in their target city (although this isn’t required). In contrast, explains SoKap founder David Geertz, SoKap wouldn’t approve products that require long-term R&D and “patient capital”: investors who are content to put their money in and wait a while for results. In fact, many SoKap projects are prototypes just seeking money to get to market.
Though it seems ingenious, the SoKap model is actually quite common in the film industry – on a larger scale. In the past, films raised money by selling royalties by country. But a few problems arose: royalties for an entire country are expensive, and foreign markets lost money when films debuted domestically and were pirated online. Geertz wondered: What if you could sell movie rights by city instead? He had a history in the film industry, from operating boom poles to producing documentary TV. So SoKap launched with movies in mind, and only moved into technology when startups became intrigued – and Geertz realized he had developed a powerful alternative to JOBS Act crowdfunding. So he led a session at SXSW and was met with a ton of enthusiasm:
“The Social Media Club people likened us to staking a claim at the Oklahoma Land Rush, and taking your red flag and putting it in the ground and saying, ‘I own this. Whatever comes out of this ground is mine,’” he recounted.
But Geertz isn’t opposed to the JOBS Act – in fact, he and SoKap officially support it. He just wants to make sure startups don’t give away equity when they don’t need to.
No matter where your startup is based, you can try SoKap if you’re hesitant to give away chunks of your company – or just can’t wait for the SEC to get its act together.
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