Article : A New Untapped Opportunity for Biotechnology Start-ups? Sholeh Azar is a recent graduate of the joint master of advanced studies (MAS) degree program in health policy and law, University of California, San Diego and California Western School of Law. She is now a management consultant in Health and Public Service for Accenture in San Diego. Tim Mackey is an Assistant Professor in the Department of Anesthesiology and Division of Global Public Health at UC San Diego - School of Medicine. He is also the Director of the Global Health Policy Institute and Associate Director of the joint master of advanced studies (MAS) degree program in health policy and law. Abstract Crowdfunding is an evolving popular Internet-based process used to raise funding that has been employed by a few start-ups in the biotechnology industry. To solicit funding, companies profile their case on a specialized web platform (generally called a “crowdfunding portal”) to ask the site members (i.e., the “crowd”) who then choose which projects they would like to fund, in exchange for financial and nonfinancial inducements. In this paper we examine the evolving commercial and regulatory crowdfunding landscape and also identify case studies of biotechnology industry use. We find that a variety of crowdfunding mechanisms have been used and this alternative financing strategy may represent a viable option for biotechnology start-ups during early stage research or early stage clinical trials. A successful crowdfunding campaign may pave the way for the enterprise’s future capital formation phases by attracting angel investors or because it shows that the business or project is viable. However, crowdfunding, like all other forms of capital formation, requires careful planning and execution before, during, and after a campaign. Strategies that appropriately tap into this innovative and disruptive use of technology and social networks may prove to be a unique capital formation niche for biotechnology start- ups; one that has yet to be fully leveraged.

Journal of Commercial Biotechnology (2015) 21(4), 15–14. doi: 10.5912/jcb717 Keywords: crowdfunding; angel investors; biotechnology financing; start-ups; social media marketing

that over $3 billion was raised through donation or BACKGROUND reward crowdfunding in 2013.1 Despite this market potential, the current exercise by, applicability to, and rowdfunding is a fairly new phenomenon. future impact of crowdfunding on the biotechnology Companies and individuals post on the Internet industry remain relatively unknown. Taking this into to ask the public to fund ideas, projects, and new account, this article examines the evolving commer- Cventures. It is now utilized as a worldwide funding cial and regulatory landscape of crowdfunding and strategy across a wide spectrum of industries and eco- also identifies case studies of its use by biotechnology nomic sectors, specifically including the biotechnology firms. Our findings can help guide the biotechnology sector. Although a relatively nascent instance of tech- industry to determine the potential opportunities and nology combined with financing, its use is growing challenges faced by this disruptive form of financing rapidly; Deloitte Touche Tohmatsu Limited estimated technology.

Correspondence: Tim K. Mackey, UC San Diego, USA. Email: tmackey@ ucsd.edu

NOVEMBER 2015 I Volume 21 I Number 4 15 UNDERSTANDING CROWD– consumer goods (e.g., games, hardware, software, and and equity models are collectively referred to as “finan- crowdfunding portal facilitates all aspects of crowd par- FUNDING electronic devices), and various causes (e.g., community cial return crowdfunding” and are regulated by the ticipation including collection of funds, distribution to projects), but has not been widely adopted by biotechnol- country-of-domicile’s financial laws and regulations.10 projects, necessary record-keeping, and management of ogy firms. Nevertheless, the current crowdfunding envi- Financial-return crowdfunding portals that operate in communication with the project backers (see Table 1 for a list To understand its potential implications for biotech- ronment may still represent a potential avenue for small a foreign country sometimes must also comply with a of popular donation/reward crowdfunding portals). One nology, the concept of crowdfunding must first be biotechnology firms to raise capital for their early phase second country’s financial or securities laws and regu- of these portals, Experiment (formerly called Microryza), explored. It is unique from other forms of financing in research and development (R&D), such as proof-of-con- lations that are applicable to their activities. For exam- is dedicated to scientific projects and includes partners that crowdfunding creates an ecosystem—an environ- cept (POC), or for clinical trials. ple, a United Kingdom (UK)‑based financial-return from major academic institutions and nonprofit medical ment that facilitates capital formation in an organic and Historically, biotechnology start-ups have relied crowdfunding portal intending to operate in the United centers. Although no active health-related biotechnol- self-perpetuating manner by which small amounts of either on debt financing, or equity capital from VCs, or States (U.S.) must also comply with all applicable U.S. ogy projects are currently posted on the portal, projects money are raised from a large number of people, typi- angel investors. However, equity-based funding results laws and regulations. We further describe these differ- have been funded during early stage discovery, basic cally through the Internet.2 The ecosystem integral to in loss of ownership interest, whereas in nonfinancial- ent models in detail in the following subsections and research, and other types of investigator-driven health- crowdfunding can be efficient, effective, and faster than return crowdfunding ownership interest can be retained. provide specific examples of their use in science and related research. A sampling of projects funded on the traditional forms of financing that rely on personal Furthermore, VCs often are more interested in backing research. Experiment portal is as follows: resources, funding by venture capital firms (VCs), or by bigger and later-stage deals with less risk, further limit- accessing loans. ing the attractiveness of equity-based funding for early • Harvard Medical School researchers, In contrast to traditional forms of capital forma- stage or start-up biotechnology endeavors.6 The size of the Donation/Reward Model along with the Mind First Foundation, tion, crowdfunding relies on the Internet as a medium investment also matters, for VCs, which generally invest fully funded (100 percent of their targeted on which innovators market their projects and solicit $2 million and up in a financing round; and for angel In the donation/reward crowdfunding model, an entity $10,000) a research project on partitioning funds from the public as investors. Capital forma- investors that may invest much smaller amounts—$5,000 with an idea or project goes to a crowdfunding portal (a depressed people into groupings that tion over the Internet leverages the ability to access a to $100,000—either individually or as a group.7 In fact, specialized website) to request funding. Individuals or allow determination of the underlying large number of people who may choose to contrib- the Angel Capital Association provides a guide for start- organizations describe their projects and ask the crowd biology of their disease by characterizing ute to an innovator’s project. Crowdfunding portals ups that are seeking angel investment financing and spe- to fund them. Members of the crowd who decide to fund their genomes and other biology. The are Internet-based businesses that operate specialized cifically recommends approaching these investors when a a project then become its backers. They are kept informed researchers agreed to allow free access web platforms (generally called portals) to facilitate “product is developed or near completion.”8 about activities related to their project through the proj- worldwide to all of their aggregate data. transactions between entities asking for funding and For this reason, due to the nature of VCs and ect’s web page and other identified social networking Other researchers having unfettered access the crowd that provides financing. These websites also angel financing, it is becoming increasingly difficult to websites (e.g., LinkedIn, , Facebook, or a combi- to the data may reveal the biological roots act as a space to present projects and ask for funds and approach these investors during the early stages of R&D. nation) chosen by the project owners. The backers may or of these different classes of depression.13 to provide information about the progress of projects This funding dynamic has the potential to change with may not receive a small reward (e.g., a T-shirt) in return • Massachusetts General Hospital underway. Typically, the size of individual investments the passage of the JOBS Act that, according to the SEC, for their donation. The backers may also prepurchase researchers overfunded (raised 215 is small to minimize the investors’ potential financial allows crowdfunding to fill the gap for the “very early a product to raise funds for its further development. percent of their targeted request amounts) risks. stage endeavors [that] continue to be squeezed out of the Crowdfunding platforms that provide services related to their project and raised $17,217. Their Crowdfunding is also the title of Title III of the capital markets” by finally offering the option of equity- the donation/reward model currently are subject to little project sought to determine, during Jumpstart Our Business Startups Act (JOBS Act) that based financing through regulated crowdfunding.4 regulation; however, businesses trying to raise funds on testing, if using experimental compound was signed into law on April 5, 2012.3 The JOBS Act Although it is unknown how attractive crowdfunding these platforms cannot offer their backers equity securi- anle138b (a protein aggregation inhibitor required the Securities and Exchange Commission (SEC) for smaller biotechnology firms and investors under the ties or other types of financial return on investment due that is a synthetic oligomer modulator to develop regulations by October 2015 that will govern JOBS Act will be, a few cases studies based on different to securities laws. which has shown promise in therapy the offering and sale of securities through equity-based types of crowdfunding models illustrate why and how The donation/reward crowdfunding model is not for neurodegenerative diseases) during crowdfunding.4 The SEC finalized the crowdfunding small biotechnology companies might consider and use new and, using different media platforms, has essen- treatment can delay the onset of genetic regulations on May 25, 2015, the rules allow companies crowdfunding to raise capital, which we discuss below. tially been in place for decades. Many organizations prion disease.14,15 to raise up to $1 million in funds during any 12‑month have raised millions of dollars from the public through • University of North Carolina at Chapel period (subject to capped contributions based on annual traditional media including mail, television, and radio Hill researchers fully funded their project income or net worth). All transactions will be required to CROWDFUNDING MODELS for causes focused on finding treatments or a cure for and raised $10,000 to study whether the go through an portal that is regis- a number of diseases (e.g., cancer, cystic fibrosis, and transmission of BRCA mutations can be tered as an intermediary with the SEC.5 There are generally three models of crowdfunding: Alzheimer’s, among others). As an example, fiscal year prevented.16 (1) donation/reward/pre-purchase, (2) peer-to-peer (P2P) 2013 contributions, gifts, grants, and fundraising events lending; and (3) equity models that can be simplified resulted in total contributions of $16,472,823 to the CROWDFUNDING AND into the nonfinancial return and financial-return-based Cancer Research Institute (CRI) and $2,106,609 to the Peer-to-Peer Lending Model BIOTECHNOLOGY COMPANIES funding types.9 In the donation, reward, or prepurchase Pediatric Cancer Foundation. These organizations now models (hereinafter referred to as the “donation/reward also use the Internet to raise funds, among their other The peer-to-peer lending crowdfunding model is a model”), funders may receive small rewards as perks, activities.11,12 market-based financial instrument that provides loans Crowdfunding has been used predominantly for such or prepurchase products in exchange for their funds. In In the donation/reward crowdfunding model, an to businesses and individuals. The P2P lending model entrepreneurial ventures as creative projects (e.g., music contrast, P2P lending and equity crowdfunding models entity with a project goes to a crowdfunding portal is a crowdsourcing form of microcredit, a worldwide productions, concerts, self-publishing), developing are market-based financing methods. The P2P lending (e.g., Indiegogo) to solicit funding from the public. The phenomenon that now acts as a financing vehicle for

16 Journal of Commercial Biotechnology http://www.CommercialBiotechnology.com NOVEMBER 2015 I Volume 21 I Number 4 17 Project Categories Project Fundraisers for experience, cause, cause, experience, for Fundraisers nonprofit Preorder or sell products Fundraisers for causes and service organizations American (e.g., Red for Nepal raisedCross $1,215,566 relief, American Cancer Society has raised for pediatric $522,080 cancer research—ongoing) Arts, Welfare, Animal Civil Rights, Personal Emergencies & Medical Expenses, Education/Tuition, projectsVolunteer Note: no biotechnology projects Includes academic & hospital medical partners as centers Anthropology, Categories: 20 Art & Design, Biology, Chemistry, Computer Science, Data Science, Earth Science,Economics, Ecology, Material Engineering, Education, Science, Mathematics, Medicine, Neuroscience, Paleontology, Physics, Political Science, Psychology, Social Science Note: no commercial biotechnology project but early phase projects are funded 20+ categories: Animals, Business, Competition, Community, Charity, Family, Events, Faith, Creative, National News, Newlyweds, Other, Wishes, Medical,Travel, Volunteer, Education, Memorials, Sports, etc. Publishes statistics categories: Art,16 Comics, Dance, Design, and Film Video, Fashion, Craft, Food, Games, Music, Design, Journalism, Publishing, Photography, Theater Technology, Publishes statistics on partners categories:24 Animals, Art, Comics, Dance, Design,Community, Education, Environment, Fashion, Film, Food, Gaming, Health, Music, Politics,Photography, Religion, Small Business, Sports, Theater, Technology, Writing Video/Web, Transmedia, • • • • • • • • • • • • • Fees/Ownership Claims Fees/Ownership 0–2.5% of funds raised or total sales payments3% processing if credit cards used/no fee if debit cards used No claim of ownership over their projects 3–5% of funds3–5% raised + monthly fee for annual accounts 2.9% + $0.30 payments processing No claim of ownership over their projects of funds5% raised nonrefundable3% payments processing No claim of ownership over their projects Hands-off policyregarding intellectual property (open pledges) review access/peer 5% of funds5% raised nonrefundable 3–5% payments processing noClaims ownership over their projects of funds4% raised for campaigns successful 9% of raised fund for failed campaigns that keep raised funds, no charge if all money refundedis the to contributors payments3–5% processing ofClaims ownership their over projects not clear 5% of funds5% raised 2.9% + $0.30 nonrefundable payments processing ofClaims ownership: N/A • • • • • • • • • • • • • • • • • • • •

Volume/Website Crowdfunding Model/ Crowdfunding Donation (U.S., U.K. & Canada)/Fundraising/ Shopify)Sell (using Open global to backers international (requires credit cards) unknown Volume www.tilt.com Donation/Charity Open global to backers international (requires credit cards) unknown Volume www.crowdrise.com Donation All-or-nothing funding model U.S.- only Currently based projects, although piloting projects from Australia, Canada, U.K. & Donation Open global to backers countries) (certain All or nothing B raised $1.8 www.kickstarter.com Donation Open global to backers Reach target or keep amount raised the unknown Volume www.indiegogo.com Donation/Charity Open global to backers No penalty for not reaching targeted amounts B raised Over $1.1 www.gofundme.com • • • • • • • • • • • • • • • • • • • • • • • • • • Projects Biotechnology Biotechnology searchable) projects listed the targeted selling by amount products None is not (site None 6 Biotechnology 50+ Medicine 17 Neuroscience None 6 biotechnology A project exceeded None ountry) Portal C Ownership, Ownership, aunch Year, ( L aunch Year, Crowdfunding Crowdfunding (2008) U.S.) Private, financing A-round (formerly (formerly Microryza) (Index Ventures are & SV Angel among portal’s investors) with $40 million financing B-round in 2014, U.S.) Tilt Crowdtilt (Formerly (Relaunch 2012, $12 million : portalSource websites. Crowdrise U.S.) (2010, Private, Experiment U.S.) (2012, Private, include Investors List of popular donation/reward crowdfunding portals crowdfunding 1: List of popular donation/reward Table Kickstarter U.S.) (2009, Private, Indiegogo (2008, Private GoFundMe U.S.) (2010, Private,

18 Journal of Commercial Biotechnology http://www.CommercialBiotechnology.com NOVEMBER 2015 I Volume 21 I Number 4 19 entrepreneurs around the world. Crowdsourcing for form of lending, it remains to be seen how the P2P lend- capital formation (i.e., P2P crowdfunding) provides the ing market may evolve in the future. It may nevertheless necessary funds for small businesses that may not have still represent a pathway to access for small access to established sources of capital due to a variety biotechnology companies.4 of reasons.17 In P2P crowdfunding, borrowers ask the crowd for a loan on a lending portal and supply sufficient informa- Equity Model tion about the purpose of the loan, their credit, and other financial information required by the portal. Members of The U.S. equity model of crowdfunding resembles tradi- the crowd (that is, backers) decide how to lend money— tional investment models that include funding by VCs, secured by requiring collateral or unsecured—to a bor- angel, or accredited investors. Start-ups issue securities rower, and under what terms (simple or compounded to purchasers by using crowdfunding portals as inter- interest rates). In some cases, unlike traditional lenders, mediaries, resulting in a transfer of ownership interest backers may go through a reversed auction to set the in the business in return for funding. Options for offer-

lowest interest rate for the loan amounts. A P2P lend- ing equity-based crowdfunding under the SEC’s rules and Characteristics Categories Loan Business loans: $300,000, up to fixed monthly year term,payment, no fee 1–5 or penalty for payoff Requirements: 2 years in business, at least in annual sales, $75,000 no recent bankruptcies or tax liens All loans made WebBank, by a Utah-chartered industrial bank, member FDIC. Investors do not directly invest in loans; they purchase Member Dependent Notes from Lending Club. Loans are not issued borrowers to from IA, ID, orME, NE. ND, Investor ROI: 5.06% 8.74% to Repayment options are 3 or 5 years Pre-set rates based on borrower’s credit risk. All borrower loans are fixed-rate, unsecured, fully amortizing loans with simple interest. Excludes some borrowers from multiple states All loans made WebBank, by a Utah-chartered industrial bank, member FDIC. Investor ROI: 8.89% Notes offeredProspectusby ing portal facilitates loan origination, collection of funds include conditional small issues exemption (Regulation Repayment options are 3 or 5 years Pre-set rates based on borrower’s credit risk. All borrower loans are fixed-rate, unsecured, fully amortizing loans with simple interest. Excludes some borrowers from multiple states All loans made WebBank, by a Utah– chartered industrial bank, member FDIC. only investors Accredited return of as April trailing 12-month ROI: 11.2% 30, 2015 inInventors invest a portfolio of loans or Notes offeredProspectusby Guide Investor for the loan amounts and distribution of loans, collection A) and the limited offer and sale of securities without • • • • • • • • • • • of repayments for the lenders, loan servicing, necessary registration (Regulation D). Equity crowdfunding por- • • • • • • • record keeping, and management of communication. tals are registered with the SEC as intermediaries (regis- These portals charge fees, which comprise a percentage tered broker/dealer), which allows them to facilitate this of the loan amounts, for their services. equity exchange and receive fees for their services (see At its inception, this new financial instrument relied Table 3 for a list of popular equity portals). The portals on unrelated people (i.e., peers) as lenders and borrow- themselves are not currently exempt from Section 15(a) ers to transact business over an Internet lending portal, (1) of the Securities Act of 1933, which allows the SEC thereby bypassing traditional financial institutions. The to allow exemptions from registration for offering equity business model for lending portals has changed due to to small companies because the SEC registration pro- regulatory requirements enacted in various countries. cess is cost-prohibitive. Small companies can qualify for Since 2008, in the United States, P2P portals have been an exemption under the Securities Act of 1933 to offer required to register their offerings with the SEC as secu- securities through crowdfunding portals without going 18 rities to comply with the Securities Act of 1933. In addi- through the registration process. After the SEC grants Business Borrowers for Fees Interest rates: Fixed, + 5.9% Origination fee: variable 0.99–5.9% 8% Annualized Rate (APR): Total – 32% Additional charges for unsuccessful payment fee, late payment, check processing fee Actual depends APR on credit score, loan amount, loan term, and credit usage & history. Origination fee: variable 1–5% taken upfront from loan amount Interest rates: Fixed, 5.32–35.97% Actual depends APR on credit score, loan amount, loan term, and credit usage & history Additional charges for unsuccessful payment fee, late payment, check processing fee All loans are considered as personal loans the to business owner tion, P2P portals must comply with all applicable laws the exemption, these companies offer securities only Origination fee: variable 2.99– 4.5% taken upfront from loan amount Interest rates: fixed5.99– 20.99% based on business creditworthiness and loan terms Actual depends APR on credit score, loan amount, loan term, and credit usage & history Additional charges for nonsufficient late (NSF), funds payment, check processing fee and regulations pertaining to financial transactions and to investors who meet the requirements for purchasing • • • • • • • • • • • • • • lending. In the United States, commercially operated their securities (such as accredited investors).20 P2P lending portals also must comply with the Money The equity crowdfunding portals in the United States Laundering Control Act of 1986, Money Laundering mostly allow accredited investors to purchase securities Q, Suppression Act of 1994, and the Bank Secrecy Act of in a private transaction through the portals. Accredited ‑ 1970 among others, including consumer protection and investors (revised due to the Dodd-Frank Wall Street K, 10 privacy laws and regulations. As a result, many lending Reform and Consumer Protection Act of 2010) include ‑ portals partner with a bank that already has the neces- traditional institutional investors such as banks, insur- sary regulatory compliance mechanisms in place (see ance companies, hedge funds (but the minimum-asset Table 2 for a list of well–known P2P lending portals).19 requirements are generally higher), and individuals who P2P lending portals are increasingly lending start- qualify. Individuals or married couples who qualify 32

ups up to $500,000 based on creditworthiness. Start-ups, include those with a net worth in excess of $1 million, Model/ Crowdfunding K, Sales Reports, Prospectus ‑ Other Information/Website SEC fillings: forms 10 fillings: SEC forms 8 Default 4.3% rate: Over 7 B business loans Business loans, unsecured personal loans, medical loans No collateral needed for under $100K loans No appraisals, business plan or projections No visit borrower’s to business No appraisals or title insurance lendingclub.com Prosper Funding LLC is a is Prosper LLC Funding wholly-owned subsidiary of Prosper Marketplace, Inc. that operates the portal lending P2P Small business loans offered personalas loan, unsecured personal loans, loans, auto military loans, green loans prosper.com like individual borrowers, are required to make fixed, and those whose income exceeds $200,000 (for individu- U.S.-based portal lends to established American small businesses Partnership with VCs, banks, or borrower’s referred entity Businesses can borrow from $25,000 $500,000 to be to 60 to months repaid 12 over fundingcircle.com (U.S. website) regular payments to their lenders through the lending als) or $300,000 (for married couples) for the two most • • • • • • • • • • • • • platform. Making regular payments might be difficult recent years and a reasonable expectation of the same • • • • for some biotechnology start-ups that require a large income level in the current year.21 A private transaction operating budget before being able to market a product means there can be no general advertising or public- ountry) and generate revenue (they may have a negative cash ity aimed at investors while the offering round is open. 33 flow); or the biotechnology start-ups may have short The SEC rules require investors to be accredited by the operating histories that could impact creditworthiness. SEC; as a result, a smaller crowd of potential funders is

In such cases, the P2P loans might be less attractive to available to businesses hoping to offer equity to the crowd ( L aunch Year,

start-up businesses because of the difficulty in demon- in exchange for financial backing. The participation launched in 2013 Ownership, C Ownership, Crowdfunding Portal Crowdfunding : Loans are not searchable by business types. by not searchable are : Loans Note : portalSource websites. List of top P2P lending portals 2: List of top Table Lending Club Lending (2007, LC, Public–NYSE: U.S.) Prosper U.S.) (2005, Private, Circle Funding strating the ability to repay a loan. As a relatively new U.K.) (2010, Private, was P2P in U.S.

20 Journal of Commercial Biotechnology http://www.CommercialBiotechnology.com NOVEMBER 2015 I Volume 21 I Number 4 21 Characteristics Currently 144 Currently 144 companies are on the portal, focus on mostly consumer products companies, no biotech companies Entrepreneurs screen interested investors and select which investors to participate in their structure also, round; the terms of their raises through an Investors Rights Agreement funding Average months time 2–3 is Investment in early– and growth– stage finance for businesses businessesFunds in 48 countries Business N/A categorizing: Allows both reward- and equity-based Equity-based offered institutionalto or accredited investors only Minimum investment amount and there is $1,000 is no maximum securities-relatedAll activity conducted is through Fundme Securities Startups offering rounds A, B, C, ... Syndicated investment funds led an angel by or VC investor of 53,0814 16,9904 companies claimed funds Investment Categories and Categories Investment • • • • • • • • • • • • • Fees/Ownership Claims Fees/Ownership Commission case by case— % of the total amount Investors include USV, Canaan Partners, Google Maveron, RoseVentures, Advisors Park Mills, General Partners: P&G, and SPINs The issuers set the valuation of their companies. on Valuations CircleUp are intended to be in line with industry comparable on a revenue and net profit basis Ownership claims: not clear One-off7.5% fee to of up from successfully funded businesses carry Investor fee of 7.5% the profits(of investors) All-or-nothing basis but successful campaigns have the option overfund to Referral fees paid for successful cases Monthly subscription subscription Monthly fee, platform fees, and fee consulting Project owners agree to pay all royalties and other amounts owed any to person or entity due to their submission or any serviceuser submissions Claim of ownership rights of the project content based on legal agreements; IP might be impacted unless user has secured its IP Investors pay 0–25% deal carry lead, to 5%, to platform Investors receive a profit, if when the company is any, acquired or has an IPO • • • • • • • • • • • • • • Crowdfunding Model/ Crowdfunding Private companies offer securities investors to under Rule 506 of Regulation D on CircleUp and through Fundme Securities LLC. Supports both Regulation and 506(c) D 506(b) offerings only investors Accredited All securities related activity conducted is through Fundme Securities LLC, a wholly owned subsidiary of CircleUp Network, Inc. Fundme Securities is LLC a registered Broker/Dealer member FINRA/SIPC and circleup.com Convertible Fund, Equity, investment Campaigns: in multiple early and growth-stage finance for businesses All or nothing Angel investors & VCs Open retail to investor U.S.(not residents) from throughout Europe provide to Investors have questionnaire,investor or self-certify a “high as net-worth individual” or a “sophisticated Institutionsinvestor.” provide “high net worth unincorporated company, association, etc.”) forms. www.seedrs.com Software a service as crowdfunding platform The portal offers both rewards-based and equity-based options for small businesses All or nothing model Private companies offer securities investors to under Rule 506 of Regulation D on CircleUp and through Fundme Securities LLC Supports both Regulation and 506(c) D 506(b) offerings M in funding $179 www.fundable.com Equity investment for accredited and investors institutions Supports both Regulation D and 506(b) offerings 506(c) Syndicate investors do not directly invest in a They in invest company. a special purpose fund createdthat is specifically for the investment. This fund then invests in the The corporatecompany. form of the fund an LLC. is angel.co Other Website Information/ • • • • • • • • • • • • • • • • • • • • • • None Medical start- device up (IRISS Medical) More than 7 health-related biotechnology to companies (click see list) Selected companies: Genome Profiling Levolta (GenPro), LLC Pharmaceuticals, Enzium, MH Systems, Inc. works in association with UC San Diego’s Scripps Institution Oceanography of (SIO); UBDoc (fee- based interactive health information portal providing diagnosis, testing, and treatment) Biotechnology25+ start-ups Pharmaceuticals 10+ Medical25+ devices Health 15+ technology Biotechnology Projects Biotechnology • • • • • • • • ountry) aunch Year, ( L aunch Year, Ownership, C Ownership, Crowdfunding Portal Crowdfunding into the U.S. market the U.S. into founded in UK,founded also in U.S. operates : portalSource . websites List of popular equity crowdfunding portals 3: List of popular equity crowdfunding Table CircleUp U.S.) (2011, Private, Seedrs UK) (2012, Commercial, expand to Plans Note: Fundable U.S.) (2012, Private, AngelList U.S.) (2010, Private, portalThe originally was

22 Journal of Commercial Biotechnology http://www.CommercialBiotechnology.com NOVEMBER 2015 I Volume 21 I Number 4 23 criteria for all parties seeking to offer equity-based secu- through individual contributions, the crowd also pro- rities through crowdfunding are provided in Table 4. vided valuable DNA samples for research to measure DNA damage, which has the potential to advance our understanding of cancer and immunological disorders, CROWDFUNDING BIOTECHNOLOGY among other diseases.23

Case Studies 4 4 Apta Biosciences Few biotechnology firms have used crowdfunding to actively raise capital. Despite there being only a few In April 2014, Apta Biosciences (Apta) had a crowdfund- case studies available for review, some firms have been ing-based equity offering round on SyndicateRoom and successful in raising capital for their projects by way of raised £1,850,000 by the round’s close.24 Apta is a small different types of crowdfunding platforms. Successful biotechnology company (11 to 50 employees) that was biotechnology firms generally used crowdfunding during founded in 2013 when its technology spun out of Fujitsu. early stages of their R&D, and some used a multi-prong Its offices are in Singapore and the United Kingdom.25 U.S.C. or (c)) 80a–3(b) ., 15 strategy to market and raise funds for their innovations. SyndicateRoom is a UK-based equity crowdfunding The case studies also reveal that crowdfunding for bio- platform; its business model allows its retail members technology start-ups appears to attract a diverse group to invest alongside angel investors in equity offering of angel investors, patients, and ordinary people who are rounds that allow the same share class and same price 4 interested in funding a project for a variety of reasons per share.26 The same criteria were used in Apta’s offering beyond investment purposes. A start-up biotechnol- round, which allowed Apta to raise capital to undertake ogy firm must tell a good story for the crowd to attract the validation process of its adaptamers, a new group of support. Not only must the story be made available on synthetic molecules that mimic the characteristics of a crowdfunding platform, but a communications cam- proteins such as antibodies, for further product devel- paign must also be mounted to inform members of the opment. The company holds 25 patents for its developed public who have the potential to become members of the adaptamers. Apta’s adaptamers are called Seligos; the Requirements crowd that funds the project. In this sense, crowdfund- synthetic molecules are very stable (they do not require ing for biotechnology projects is functionally similar to cold storage), easy to produce, and purportedly deliver communication campaigns for political office; better high performance.27 campaigns have higher chances for success and garner greater funding opportunities. m atient I P 4 4

Exogen Biotechnology Inc. ImPatient is a nonprofit crowdfunding platform that 4 is currently crowdfunding its own creation and launch In January 2014, Exogen Biotechnology Inc. (Exogen) by soliciting donations.28 The portal’s funders won seed launched a reward/purchase crowdfunding campaign money when they won the top prize during the Lehigh 4 called “How Damaged is your DNA?” on Indiegogo (a Valley Startup Weekend competition sponsored by the 4 popular crowdfunding platform with 15 million monthly Lehigh University Baker Institute for Entrepreneurship, visitors, home to campaigns from 226 countries, which Creativity and Innovation.29,30 ImPatient is planning to has 310,537 followers on Google+).22 Exogen is a Berkeley, launch its crowdfunding portal in fall 2015 and operate California-based start-up that has developed blood test as a hybrid donations and loans crowdfunding platform kits for measuring damaged DNA. Exogen aimed to raise that, for a fee, will raise funds for small biotechnology $50,000, although the campaign actually raised $106,100 companies. After launching the portal, ImPatient’s sci- Companies subject reporting SEC to appropriate” determines regulation, or rule by Commission, the that issuers “Other Need transact to throughintermediaries the SEC-registered portal—aFunding registered broker—acts an as intermediary and facilitates transactions involving the offer or sale of securities under only Internet over Section websites (including through access multiple 4(a)(6) devices) File certain financial information(including reviewed auditedor financial statements, capital structure, depending on the amounts offered12–month andperiod); sold financial during a statements should be preparedaccordance in with U.S. generallyaccepted accounting principles when auditor (GAAPs) involvement required is such for as $100,000) offerings of more than Disclose certain other information about their offers—include description of the business and theuse of proceeds; targeted offering amounts, price, and deadline Additional disclosures Registered brokers as or funding platforms with the Financial Industry Regulatory Authority (FINRA) Comply with the requirements of the Securities Act Section 4(a)(6)(C) Must remain independent and prohibited from providing investment advice, soliciting purchase or sales of securities posted on their portal, compensating employees, agent, or others for soliciting sale of securities on their portal Must “hold, manage, possess or otherwise handle investor funds or securities” Must not engage in similar activities The portal’s officers, partners, and directorsmust financialhave interests not issuer in an displayed on their portal,have in and must place reduce to “measures risk of fraud” Responsible for managing crowdfunding through maintaining issuer information, qualifying investors for opening account, keeping track of investment limitation, facilitating communication, managing fund transfers, and providing appropriate financial recordkeeping for both issuers and investors Must accept purchases only from individuals with an account who their have portal and provide these individuals with all the required information under Subpart C (educational materials, notices. and transaction confirmationsby electronic means) Foreign issuers who are not organized under the of laws a state or territory of the United or States the District of Columbia seq et Investment companies80a–1 defined as (15 U.S.C 1940 in the InvestmentCompanyAct of from 597 people in two months. The company’s slogan entific advisors will select “promising unfunded medi- The amounts of an individual’s investment are capped to: of annual5 percent income ($2,000) or net worth when itless is than $100,000 percent of annual income10 or net worth per when an overall cap (with individual) itmore of is $100,000 than $100,000 The amounts of capital raised through crowdfunding offeringscompanyby a are cappedto aggregate$1 million amountssoldto all of period.investors during still A company a 12-month may raise capital from other sources or use exemptions that do not fall under the exemption Section 4(a)(6) • • • • • • • • • • • • • • • • • was: “Gain access to leading-edge information about cal treatments” for the crowd to fund as their favorite • • • • the health of your DNA while helping advance science!” medical research. The crowd includes portal’s members, Exogen’s campaign offered various perks to the crowd, who provide a minimum of $25 in the form of a loan to based on different contribution levels, including listing the medical project of their choice. The funded com- the donor’s name on the company website; a T-shirt; and panies may pay back the loaned amounts. The payback

multiple types of scientific packs and self-tracking ser- amounts are then credited to members’ accounts and can Actor vices available for purchase, with prices ranging from be loaned to another project. A loan that is not repaid is

$15 to $1299. By the end of the campaign, not only did considered a donation. Portal participating(for in under crowdfunding Section 4(a)(6)) : SEC Crowdfunding Proposed Rules. Proposed : SEC Crowdfunding Source Crowdfunding proposed rules criteria for participating rules criteria for proposed 4: Crowdfunding Table Equity Crowdfunding Equity Crowdfunding Non-Qualified Entities Investor Exogen raise 212 percent of its original funding goal Issuer

24 Journal of Commercial Biotechnology http://www.CommercialBiotechnology.com NOVEMBER 2015 I Volume 21 I Number 4 25 4. U.S. Securities and Exchange Commission (Oct. 23, as prion and Parkinson’s disease. Acta Neuropathologica DISCUSSION: CROWDFUNDING more investors. Commentary in general might serve as 2013). Crowdfunding (Proposed Rules). Available online 125(6): 795–813, doi: 10.1007/s00401-013-1114-9. an indicator of the marketability of a company or its OPPORTUNITIES AND CHALLENGES from: www.sec.gov/rules/proposed/2013/33-9470.pdf, product. 15. Vallabh, S., and Minikel, E. (2013) Can anle138b delay pp. 18, 36, 38, 41, 123, 128, 329, 330–332, accessed 20 the onset of genetic prion disease? Available online June 2015. Biotechnology start-ups generally need to raise $50 to from: https://experiment.com/projects/can-anle138b- $100 million to have a chance at developing a new drug CONCLUSION 5. U.S. Securities and Exchange Commission. Division delay-the-onset-of-genetic-prion-disease, accessed or medical device. Raising capital through traditional of Trading and Markets (May 7, 2012). Jumpstart Our 20 June 2015. VCs and angel investors has the advantage of allowing Crowdfunding may represent a viable funding option Business Startups Act. Frequently Asked Questions 16. Iorns, E. (2013) Can we prevent the transmission the start-up to receive mentoring and guidance. As these for biotechnology start-ups, particularly during the early About Crowdfunding Intermediaries. Available online of BRCA mutations? Available online from: https:// sources of capital move toward funding start-ups at later phases of R&D or for funding clinical trials. However, from: https://www.sec.gov/divisions/marketreg/ experiment.com/projects/can-we-prevent-the- stages of development, biotechnology start-ups have its potential impact remains unknown, particularly in tmjobsact-crowdfundingintermediariesfaq.htm, accessed transmission-of-brca-mutations, accessed 20 June 2015. fewer options for raising capital during early stage devel- the evolving crowdfunding regulatory and commercial 20 June 2015. 17. Howe, J. (2008) Crowdsourcing: Why the Power of the opment. However, various models of crowdfunding may environment. A successful crowdfunding campaign may 6. Debaise, C. (18 April 2010). What’s an ? Crowd Is Driving the Future of Business. New York: expand options for nontraditional capital formation. also pave the way for future capital formation phases by The Wall Street Journal. Available online from: http:// Crown Business Publishing. Small companies can quality for exemptions from attracting angel investors or VCs early in the funding pro- www.wsj.com/articles/SB100014240527023034913045751 18. Hendrickson, M. (8 Apr 2008) Lending Club Puts registration for equity offering through existing SEC rules, cess, or by showing that the business or project is viable. 88420191459904, accessed 20 June 2015. such as conditional small issues exemption (Regulation However, biotechnology start-ups must keep their mul- Hold on Lending Activity While It Sorts Out Some 7. Angel Capital Association. FAQs About Angel A) and the limited offer and sale of securities without tiple, disparate audiences in mind when seeking funding Legal Issues. Available online from: http://techcrunch. Investors. Available online from: http://www. registration (Regulation D). All U.S. equity-based crowd- from diverse sources such as VCs, angel investors, or the com/2008/04/08/lending-club-puts-moratorium-on- angelcapitalassociation.org/faqs/, accessed 20 June 2015. funding platforms currently operate under Regulation public. Furthermore, crowdfunding is still in its infancy, lending-activity/, accessed 20 June 2015. D, because Regulation A was finalized on June 19, 2015. and for this reason it is difficult to predict what opportuni- 8. Angel Capital Association. FAQs on Angel 19. Chapman and Cutler LLP. (2015) The Regulation of When considering crowdfunding with securities offer- ties or obstacles may lie ahead, especially given the imple- Investing. Available online from: http://www. Marketplace Lending – A Summary of the Principal ings, investors may consider how easily they can exit their mentation of the JOBS Act. Crowdfunding, like all other angelcapitalassociation.org/faqs/#When_should_I_ Issues. (2015 Update). Available online from: http:// securities, an exit strategy that depends on the method forms of capital formation, requires careful planning and approach_an_angel_group_, accessed 20 June 2015. www.aba.com/Tools/Offers/Documents/Chapman.pdf, of securities offering (for example, securities offerings execution before, during, and after a campaign. Social 9. Bradford, C.S. (9 Mar. 2012) Crowdfunding and the accessed 4 June 2015. through Regulation A, Regulation D, or the equity crowd- media are also a key communications medium by which Federal Securities Laws. Columbia Business Law Review. 20. U.S. Government Publishing Office. Electronic Code of funding rules finalized by the SEC under the JOBS Act. to successfully solicit funds. The crowd intelligence serves 2012(1). Federal Regulations (Part 230). Available online from: In the United Kingdom, where many angel investors to vet ideas and projects prior to their commercialization. 10. Kirby, E., and Worner, S. (Feb. 2014) Crowd-funding: http://www.ecfr.gov/cgi-bin/text-idx?SID=465dc425 actively participate in equity crowdfunding alongside The crowd—the investors—also can be transformed into An Infant Industry Growing Fast. International 1925603a672a767b7916fc49&node=sg17.3.230_1498. retail investors, the Financial Conduct Authority (FCA) a marketing engine for the start-up, should both parties Organization of Securities Commissions. Report sg11&rgn=div7, accessed 28 June 2015. published a statement in its crowdfunding review of its have a vested interest in the success of the project. number: SWP3. Available from: https://www.iosco.org/ regulatory approach in February 2015. The statement In conclusion, biotechnology start-ups need to know 21. Investor.gov U.S. Securities and Exchange Commission. research/?subSection=staff_working_papers, accessed 20 indicated that equity crowdfunding grew by 201 percent that (1) crowdfunding is happening now, (2) it behooves (23 Sep 2013) Investor Bulletin: Accredited Investors. June 2015. in 2014; 25 firms currently are authorized to engage in them to take the time to understand how it works today Available online from: http://www.investor.gov/news- equity crowdfunding or are appointed representatives, and in context of the JOBS Act, and (3) they must strat- 11. Charity Navigator. (FYE Jun. 2013) Cancer Research alerts/investor-bulletins/investor-bulletin-accredited- and applications from an additional 10 firms currently egize if they want to appropriately tap into this unique Institute – Current Rating. Available online from: http:// investors, accessed 28 June 2015. are under review.31 A potential area of concern for the and disruptive opportunity. www.charitynavigator.org/index.cfm?bay=search. 22. Indiegogo. (2015) About Us. Available online from: FCA was that negative comments on some crowdfund- summary&orgid=3417#.VY-hPflVikp, accessed 20 June https://www.indiegogo.com/about/our-story, accessed ing portals were deleted; these negative comments might 2015. 26 May 2015. serve to alert potential investors of risks associated with References 12. Charity Navigator. (FYE Jun. 2014) Pediatric Cancer 23. Exogen Biotechnology. (2014) How damaged is your investing in a company. It would be prudent for biotech- Foundation – Current Rating. Available online from: DNA? Available online from: https://www.indiegogo. nology companies to promptly respond to any questions 1. Deloitte Technology (April 25, 2014). 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26 Journal of Commercial Biotechnology http://www.CommercialBiotechnology.com NOVEMBER 2015 I Volume 21 I Number 4 27 26. SyndicateRoom. SyndicateRoom – A new way of here-are-five-different-approaches-to-crowdfunding-for- investing. Available online from: https://www. biotechnology/, accessed 26 May 2015. syndicateroom.com/faqs.aspx, accessed 26 June 2015. 31. Financial Conduct Authority. (2 Feb 2015) A review 27. Apta Biosciences. (2014) Introducing Seligos from Apta. of the regulatory regime for crowdfunding and the Available online from: http://www.aptabiosciences.com/, promotion of non-readily realisable securities by other accessed 26 June 2015. media. Available online from: http://www.fca.org.uk/ 28. ImPatient. Support the new non-profit changing the your-fca/documents/crowdfunding-review, accessed 26 way charitable money funds medical research. Available June 2015. online from: http://www.beimpatient.org/, accessed 20 32. Briggman, S. Top 11 Debt Crowdfunding Sites. May 2015. Blog entry, n.d . Available online from: http://www. 29. Pena, S. (21 Nov 2013) Crowdfunding platform crowdcrux.com/debt-crowdfunding-sites/, accessed 26 ImPatient wins Lehigh Valley Startup Weekend. June 2015. Available online from: http://www.keystoneedge.com/ 33. Clark, P. (17 July 2014) Funding Circle Raises $65 Million features/lehighvalleystartupweekend1121.aspx, accessed for Peer-to-Peer Small Business Loans. Bloomberg 20 May 2015. Business News. http://www.bloomberg.com/bw/ 30. Baum, S. (21 Apr 2014) Here are five different approaches articles/2014-07-17/will-funding-circles-65-million-help- to crowdfunding for biotechnology. MedCity News. it-compete-with-banks, accessed 27 May 2015. Available online from: http://medcitynews.com/2014/04/

28 Journal of Commercial Biotechnology http://www.CommercialBiotechnology.com