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at the companies, but it will need to verify whether players are “accredited” investors before they invest. “Just like how a casino advertises, ‘come and gamble,’ you still can’t get in if you’re 15 years old,” Simon says.
Before listing companies, Poliwogg will review them to make sure they have viable technology, a real business plan, and a management team that isn’t “just led by somebody’s nephew,” Simon says. He adds: “We’re not picking winners and losers, but we want to make sure these are investable entities.”
Once a company gets listed, the crowd gets involved. The company sets a goal, like, say $5 million to run a Phase I clinical trial of a new drug for ALS (Lou Gehrig’s disease). If the company reaches that goal, it gets the money, and it will pay a fee to Poliwogg, Simon says. If the company doesn’t reach its goal, investors get their money back. At least in theory, serious money could flow. Under what’s known as Regulation A, pre-IPO companies previously could only raise $5 million, but they can now raise up to $50 million under the new law, Simon says.
Investors, especially those putting in big bucks, will want equity. If Poliwogg is successful, it will build a deep roster of companies, so investors can put their eggs in multiple baskets for treating cancer, Alzheimer’s, or diabetes. Diversification, Simon says, is the key to making these biotech offerings work for investors.
It all may sound great, but there’s surely a lot of pain to come. Most people would agree that buying lottery tickets, or going to the casino, is a good way to throw away hard-earned money. Investing in biotech, without doing the homework (or even when you know the science), offers bad odds. If you think the NASDAQ and the OTC Bulletin Board already have too many shady biotech operators, then just wait for a lightly regulated exchange for lesser-known private companies.
Even if Poliwogg does an exemplary job of disinfecting its platform, it’s still questionable in my mind how much money its companies will raise. Biotech still often takes a decade of work, and tens of millions of dollars to gather solid medical evidence required to start selling a new product. No crowdfunding effort to date that I’m aware of has ever raised that kind of cash. Will people want to shell out massive sums for some promising drug that has shown in rats that it might help 7 percent of children with Duchenne Muscular Dystrophy? How about some platform technology like a new gene sequencer, which doesn’t tug at people’s emotional heartstrings?
And then there’s the question of who will want to be listed on platforms like Poliwogg. Most of the viable private biotech companies that I follow around the country have already raised $10 million or $20 million or more in venture capital. Will the venture backers of those outfits allow them to run a crowdfund campaign to raise another $5 million to do another experiment? Even if it means diluting the value of their holdings, and potentially creating investor relations and communications hassles with a far-flung base of rookie shareholders? Will the VCs be willing to let go of control, and allow some transparency into what’s really going on in their portfolio companies?
I doubt it. That means most promising private biotech companies in the U.S. will probably shy away from this new fundraising vehicle. The folks who are more likely to benefit are the ones with a new idea spinning out of a research center or a Big Pharma company, and who just need their first $1 million or $2 million to get going.
Despite all the caveats, David Miller, the president of Biotech Stock Research in Seattle, says he believes crowdfunding will have broad appeal among individual biotech investors. There’s a longstanding tradition in this country of generous support for research at places like the Dana-Farber Cancer Institute in Boston or UC San Francisco. Many of those donors also want to take the next step, by investing in companies building on that research to develop treatments. And while there are places to invest on the NASDAQ—like Dendreon (NASDAQ: DNDN) or Medivation (NASDAQ: MDVN) in prostate cancer—there’s always some new up-and-coming competitor to watch in private biotechland, like Cambridge, MA-based Tokai Pharmaceuticals.
“I think these guys at Poliwogg have read the market correctly,” says Miller, who writes a subscription-only newsletter for biotech stock investors. “People will be jazzed about the idea of investing in things they care about, and getting equity.” It’s less likely that investors will fully understand the risks, or how much their equity will be diluted through endless future stock offerings, he says.
Consumer groups opposed the JOBS Act for some of these reasons, to protect investors. Simon dismisses the arguments as outdated. “Let’s take my sister for example. She’s a schoolteacher, a non-accredited investor. She can go on the public stock market and buy anything at any time. She can buy stocks in Malaysia if she doesn’t even know where Malaysia is. But she can’t invest in a friend’s store down the street because it’s a private company. She can’t invest in a biotech company that’s private. That’s crazy.”
You could argue that it’s also crazy for people to be able to be able to dump their life’s savings into a single biotech stock they don’t understand, and watch it vaporize. But sadly, it’s part of what happens in a democratized investment world. I hope that the operators of the new biotech crowdfunding platforms are responsible, and that regulators stay on their toes. If not, a lot of people will end up thinking that “biotech” and “crowdfunding” are a couple of dirty words.
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