I got an exciting email this week: As of August 28, I’m the owner of 181 shares in Gab.ai, the “free speech” Twitter clone founded by ostracized Silicon Valley Trump supporter Andrew Torba. What does owning 181 shares in Gab get me? I have no idea, really.
Until recently, investing in startups was essentially restricted to professional investors and rich people. The Securities and Exchange Commission structured its rules, established under the Securities Act of 1933, so that a startup like Facebook could collect money from “accredited investors” — those with a net worth of $1 million or a steady income of $200,000 a year — with minimal disclosure requirements, but if a startup wanted to get funding from smaller investors, it would have to do a bunch of paperwork and assume additional liability.
Investing in new companies is risky. Most new companies fail, and even if the company does take off, it’s easy to get screwed over. The SEC’s rules protected unsophisticated investors in high-risk high-reward vehicles, including startups, from being fleeced. But at the same time, they restricted profits of early startup investment to elites and cut off an opportunity for startups that couldn’t get traditional funding. As crowdfunding got popular, this logic seemed to fall apart. If you could do a GoFundMe for a cancer patient or a Kickstarter for potato salad, why couldn’t you offer shares in a new company in exchange for cash?
In 2012, President Obama signed the Jumpstart Our Business Startups (or JOBS) Act which, among other things, made it possible for ordinary folks to invest in startups. This idea is called equity crowdfunding or regulation crowdfunding, and it took the SEC four years to implement new rules around it due to complexities and delays. Finally initial offerings started rolling out earlier this year.
I had been scouting for a company to invest in as a way to report on how the new crowdfunding rules are working out. I considered Legion M, the movie studio that invites fans to invest in it, but decided against it because the film business moves too slowly. I looked at The Speakeasy, an immersive theater in San Francisco that has raised more than $1.2 million, the most out of any equity crowdfunding venture so far according to one independent index; good for them, but not my expertise.
So far, none of the alt-tech sites have managed to get traction. Could Gab be the first?
Then two months ago, Gab.ai announced it would be raising $1.07 million, the maximum allowed per company per year under the new law. Although it has pushed back on the idea that it is a far-right site, Gab bills itself as a refuge for people who have been banned by other internet platforms, and its much-touted commitment to “free speech” is a not-so-subtle dog whistle to alt-righters (its logo is also a Pepe-esque frog head, so there’s that). Gab is part of a microtrend of “alt-tech” sites including the Wikipedia of the alt-right and the Reddit of the alt-right. So far, none of the alt-tech sites have managed to get traction. Could Gab be the first?
Gab launched its campaign on StartEngine, one of the Kickstarter-esque platforms that has popped up to process equity crowdfunding offerings. The campaign included about as much detail as you’d get from a Kickstarter page. There was a video explaining the service, a 29-page document that includes some ambiguous figures and minimal financial information, and a manifesto outlining Gab’s different business opportunities, including charts with user growth. The company valued itself at $9.9 million with no real justification, which it admitted. “We have not undertaken any efforts to produce a valuation of the Company,” the offering said. “The price of the shares merely reflects the opinion of the Company as to what would be fair market value.” Accordingly, each share is priced at $1.10. The minimum investment is $199.10, or 181 shares. I submitted my credit card information, requested 181 shares, and four weeks later, I got an email from StartEngine confirming my investment. Ultimately, Gab.ai reached its maximum fundraising allowance of $1.07 million from 1,792 investors. “Congrats to @a and the whole team for hitting their investment goal,” alt-right advocate Milo Yiannopoulos wrote on Gab. “They've learned something I already knew... having the entire hysterical left against you is GREAT for business.”
There were a few things I noticed during this process.
Gab’s investors are clueless. Reading through the comments confirmed the worst fear critics had about equity crowdfunding: The people attracted to Gab’s offering appear to include many who lack basic fluency in finance and some who are poor. Some would-be investors said they couldn’t afford the $199.10 minimum investment. One user asked if Gab would receive a stock symbol. Another misread the instructions and thought they had to have a net worth of $2 million in order to invest. “I want to purchase 1,000 shares & I can't find the share price in order to transfer correct amount. Anyone?” one user wrote. “Yes, I tried asking at help desk here. No lie, they didn't know how to answer question. Anyone? Anyone?” People who had coherent questions about things like dilution were also ignored. At one point, two commenters devolved into a comment war. “I have spent more time in my career structuring offering and with securities attorneys than you spent with your mother's boyfriend growing up,” one wrote. “You are an idiot. Go look up what YTD stands for and think of snappy reply (sic),” the other user responded.
I can’t figure out what percentage of the company I own. Gab.ai did not offer much information about its financials and the information it does offer is ambiguous. After I got my 181 shares, I tried to figure out the answer to the most basic question of investing: How much of the company do I own? The best way to figure that out is to look at my number of shares, 181, and divide that by how many shares there are total, except that the latter proved difficult to figure out. The cover of Gab’s offering says, without context, “9090 shares of Common Stock,” which appears to be the minimum it was hoping to issue. Later the document says: “Common Stock: 9,000,000,” and notes that cofounders Andrew Torba and Ekrem Büyükkaya own 66.67 percent and 27.78 percent of common stock, respectively, which would be 94.45 percent total. But 94.45 percent of what? If they owned 94.45 percent of the company, that would mean 5.55 percent is up for the taking in the crowdfunding campaign, right?
Except that Gab valued itself at $9.9 million and issued $1.07 million worth of shares, which means the company offered 9.2 percent, not 5.55 percent. So maybe that 5.55 percent is owned by someone who isn’t listed in the document? Or maybe the 5.55 percent was offered to crowdfunding investors, and the founders were planning to hand over some of their stock to make up the other 4.45 percent. Not sure. At any rate, as it turns out, 9 million is not the total number of common stock shares in the company. Later in the document: “The Company has authorized 12,000,000 shares of common stock with $0.0001 par value. During 2016, the Company approved the issuance of 9,000,000 shares of common stock to founders for $900 in consideration, subject to a restricted stock purchase agreement each entered into which were memorialized in 2017.”
So! OK, it’s kind of unclear what percentage of the company Torba and Büyükkaya own. It seems like the million shares that were offered up to crowdfunding investors were probably pulled out of that additional 3 million that was authorized but not issued to founders. If that’s true, the company has issued around 10,000,000 shares, which means I own around .0018 percent of the company.
Great! But I have no idea if that’s correct. I asked Gab to clarify, but the company directed me to its public comment thread on its StartEngine page, citing SEC rules. “All investment related questions can be answered through the portal, as per SEC rules,” Utsav Sanduja, the company’s chief communications officer, told me in an email. I left a comment, but the company hasn’t answered any questions in two weeks; it also ignored previous potential investors who asked the same thing. (My comment was deleted by StartEngine 18 hours later because it included a direct email address. I reposted it but my expectations are low.)
The companies themselves may be clueless. New companies could theoretically do this process without consulting a lawyer (Gab did not answer me when I asked if it had consulted a lawyer for its offering). “Many of these companies are obviously quite new to doing this stuff,” said Joe Green, a former startup attorney with Gunderson Dettmer who has studied the new crowdfunding regulations. “Some of them may be doing this themselves.” The SEC’s rules also leave room for interpretation, he said, which can lead to sloppy disclosures. Gab’s disclosure, for example, was “quite bad,” he said, because it did not include enough information to calculate what percentage of the company was being offered. “Based on the SEC’s rules, you should have all the numbers you need to calculate that percentage,” he said. That isn’t always possible with these offerings. “Because the disclosure in many cases is unclear, it’s hard to do.”
StartEngine does not verify your income. The SEC still has some requirements to protect amateur investors, including limits on the percentage of your income or net worth you’re allowed to risk in a year. For example, if you have an annual income less than $107,000 (hi, that’s me), you are automatically allowed to invest up to $2,200 a year. Depending on your income and net worth, you may be eligible to invest up to $5,350 a year. StartEngine asks that you check a box affirming that you are not exceeding the limit, but it doesn’t make any attempt to verify your actual income; it’s even less effort than the age limit queries that pop up on beer sites, which usually ask visitors to type in their date of birth. This passive confirmation may not be enough to meet its obligation under the SEC rules, Green said. When I asked StartEngine to clarify its level of diligence, I got a stock answer about the SEC rules.
You really need a lawyer to fully understand what you’re getting into. I had a lawyer walking me through the process, and I still found it pretty dense. In traditional startup investing, a million dollar fundraising round would probably be considered a seed round. The entrepreneur might have little more than a business plan and a pitch deck, but the stakes are low and venture capital investors know exactly what questions to ask. Both sides can also afford lawyers to vet the terms. The knowledge about things like the type of security and the likely impact of future investments on the current investors is already baked in. If Green hadn’t patiently explained to me the difference between preferred stock, common stock, convertible note, and the relatively new Simple Agreement for Future Equity (SAFE) instruments, I would not even have thought to ask what type of stock I was getting.
“The price of the shares merely reflects the opinion of the Company as to what would be fair market value.”
For now, most equity crowdfunding investors seem to be participating out of passion rather than as a savings or investment strategy. The experience depressed me, though. There is excitement around equity crowdfunding. People genuinely hoped it would give rise to weird companies that could never have gotten traditional investment and that it would crack the finance world’s monopoly on rocketship returns. That seems far away. Talking to Green, a self-described equity crowdfunding skeptic, didn’t help. “One of my concerns is that there is an adverse selection problem here,” Green said. “These companies are turning to crowdfunding because they have no other alternative, which could mean we are foisting on the general public companies that may be at the bottom of the barrel.” Furthermore, if a company does succeed, venture capitalists are likely to swoop in — which could result in early investors being diluted to the point that they are virtually shut out of the company. “Be aware that the great likelihood is that you are going to lose all of your money,” he said.
Venture capital is a clubby world and it’s true that equity crowdfunding may enable some deserving companies to break through. But even if these companies get the money, they don’t get all the other things that come with a venture capital funding, like lawyers and mentorship.
“It’s really early days,” he cautioned. “For all the excitement and the waiting for four years, there hasn’t been that much dealflow. It kind of remains to be seen.” Then, “My personal view is that at some point there may be some class action lawsuits.”
I’m excited to embark on the rest of my crowdfunding adventure with Gab. I just wish I knew how much I owned.
Update, September 1, 3:55 p.m.: Andrew Torba of Gab emailed to say that the company issued 972,727 shares to crowdfunding investors in addition to the 9 million issued to the founders. That means the company has issued 9,972,727 shares total. I have 181 of those shares; thus, I own approximately .0018 percent of the company. Crowdfunding investors own approximately 9.75 percent of the company, while the rest is owned by Torba, Büyükkaya, and an unnamed shareholder.
Adventures in Equity Crowdfunding will continue as I monitor my investment in Gab.ai. Am I going to get rich? Will the company ban me because I said it was alt-right? Watch this space for updates.