Reprinted from Wall Street Journal
- By LORA KOLODNY
An Ohio startup called Crowdentials Inc. has raised $300,000 for technology that verifies accredited investors online so that when they attempt to put their money into startups, funds or other assets, the process goes smoothly, with little paperwork and no delays.
Under Title II of the JOBS Act, startups have been permitted to engage in “general solicitation“–advertising their need of funding publicly, not just to accredited investors. But to take an investor’s’ money, entrepreneurs must make a reasonable effort to verify that their would-be backers meet the legal definition of “accredited investor” when a deal is struck.
The paperwork and process affiliated with such verifications is a subject that Fred Wilson, managing partner at Union Square Ventures, recently groused about,writing on his blog:
“Though the size of the accredited [and] qualified investor market may be small, I really don’t understand why there isn’t a Web service where I can go, fill this form out once, and then certify that the answers are correct, and then simply [authenticate] with this service each time we make an additional investment.”
Rich Rodman, chief executive and founder of Crowdentials, said his company’s software and services do as Mr. Wilson suggests, making fundraising and investing online “painless,” the way that Intuit and its TurboTax software made paying taxes easier. Mr. Wilson couldn’t immediately be reached for further comment.
The early users of Crowdential range from investment banks and private equity and venture capital firms to individual angel investors and startup founders. The company licenses its software as a service, and offers it as a “white-label API,” Mr. Rodman says.
Crowdfunding platform companies can outsource investor accreditation to Crowdential using its API, and focus instead on connecting hot startups with “value add” investors, Mr. Rodman said.
The company charges startups to verify investors in a syndicate at the cost of $20 to $40 per investor. The charge is a one-time fee. Once an angel investor in a syndicate is verified, the startup does not have to pay again. Crowdential keeps an investors’ accreditation status verified, over time.
Crowdfunding platforms and institutional investment firms that use Crowdential’s API on their own sites can choose to pay verification fees on behalf of startups they want to fund. They can buy “batches” of verifications at a discounted rate.
This kind of vetting used to cost startups and venture firms hundreds to thousands of dollars per deal or fund, said Charles Stack, CEO of FlashStarts and lead investor in Crowdentials.
The investor expects the company, a graduate of his FlashStarts accelerator in Cleveland, to use its seed capital to bring in at least 50 institutional partners and crowdfunding platforms in 2014, and to work with even more individual businesses.
Competitors providing compliance-related services to investors and startups include other startups like CrowdCheck and CrowdBouncer LLC.