Startup Snapwire to use SEC's new crowdfunding rules to raise capital

Technology startups face many challenges. Besides building brand recognition and amassing customers, they also need to raise money to keep their companies running. For Chad Newell, the CEO and co-founder of the on-demand stock photo agency, Snapwire, he’s had success in creating a service that’s attracted a loyal following: Since we last spoke with him, when he launched the company in July 2014, Snapwire’s user base has grown to more than 285,000 photographers with 14,000 registered buyers.

But to grow the company further, a startup like Snapwire needs money, which is why last year, Newell tested the waters of a new government deregulation that could help startups raise money easier than traditional routes. Today, Snapwire is moving forward with that plan, looking to raise $50,000 of equity investment through an entirely new form of crowdfunding. Two hours after launching, the company was 31-percent founded.

The new U.S. Securities and Exchange Commission’s regulation, known as Title III of the JOBS Act, or Jumpstart Our Business Startup, went into full effect in May, and it changed how small companies can raise money. Previously, startups that wanted to file an initial public offering (IPO) had to meet strict guidelines, and could only raise funds from accredited investors, or those who have a net worth of $1 million or more or earn at least $200,000 a year.

The problem with this approach is that it limits investment to just two percent of the population. And these investors will only look at large companies that have the potential to deliver larger returns, such as Facebook, Google, or Alibaba.

The new regulation changes that, enabling private companies to raise up to $1 million in small investments through crowdfunding. Unlike Kickstarter or Indiegogo, which provide “rewards” to backers with different tiers based on the level of contribution, Title III investments are exactly that: investments. Essentially, everyday people can now buy equity in a company in a way normally reserved for institutional buyers, with all the inherent risks and potential rewards therein.

As good as the new deregulation is for small businesses, it can still be expensive for a startup, costing up to $100,000. Furthermore, companies still need to go through standard SEC filing requirements, which can be a three-to-four-month process. Snapwire initially began working with SeedInvest last year to see if there would be public interest in Snapwire.

At that time, Snapwire was actually looking at Title IV, a slightly different variation of equity crowdfunding for companies raising up to $50 million. Snapwire received more than $5 million in pledges from approximately 1,000 users. No money actually exchanged hands during that phase, but it helped Newell determine if this type of fundraising would make sense. And apparently, it did.

Since we last reported about Snapwire’s exploration of a mini-IPO, on August 5, 2015, Snapwire is now charging full steam ahead. It turned to another crowd-based investment platform, StartEngine, to host its fundraising campaign.

“We are excited about making use of this new securities law that allows individuals who like what Snapwire is doing and what we stand for to directly invest in our company through StartEngine,” Newell said in a statement. “The infusion of capital that we are expecting from our crowdfunding campaign will help us to grow more quickly by making it possible for us to serve our photographers and photo buyers even more effectively than we already are.”

That’s another key difference between this type of investment and the traditional methods of startup fundraising: Snapwire isn’t beholden to the interests of venture capitalists. Since it expects most of its investors to be individuals who either participate in or care about its service, Snapwire can simply focus on serving its users in the best way possible.

As with any stock offering, there are benefits and risks. A successful mini-IPO not only helps Snapwire raise funds for growth and expansion of services, it demonstrates Snapwire as a viable company that has a loyal following. If Snapwire can continue to grow its user base and offer a compelling product, that could help Snapwire in future fundraising (it’s much easier to convince venture capitalists to invest if you have a product that sells itself) or even a traditional IPO.

“If you’re a solid business model, and not a unicorn, you can raise capital,” Newell told Digital Trends last year. “It provides confidence to the traditional crediting network as well, if [mini-IPO investors] are willing to do a soft commitment.”

While Newell was cautious during the exploratory phase last year, Snapwire has already seen tremendous success with it’s StartEngine campaign. Within the first few hours of going live, it raised over $15,500, or about 30 percent of its goal. The StartEngine campaign also runs much longer than the typical Kickstarter or Indiegogo equivalent, with 155 days left to invest.

For Newell, however, he was most excited by the early positive response from Snapwire’s community when the company announced it was looking into a mini-IPO. It pointed to the dedication that users have for Snapwire, because building a community means more, he said. But he was also thrilled that if Snapwire could raise funds from within this community, it meant he can serve them, not venture capitalists or banks; he could continue to build out services that matter to Snapwire users, instead of trying to appease creditors who are more concerned about returns.

Snapwire launched in 2014 as an alternative to the standard stock photo model. It pays photographers up to 70 percent of the licensing fee when a photo sells, and offers opporuntities for photographers to compete for business based on requests from photo buyers.

Les Shu contributed to this article.