United States

GROUNDFLOOR launches peer to peer Real Estate Crowdfunding platform

By David Drake

GroundFloor, a peer-to-peer real estate lending platform, is launching a landmark securities offering that enables crowdfunding of real estate transactions. This innovative move will allow approximately 43 million Americans in six states to invest in real estate in a way that wasn’t possible until now.

Lending money to a real-estate developer used to be something reserved for banks and other accredited investors. GroundFloor is changing the rules of the game, allowing individuals to become lenders in real-estate projects. The developers of such projects will pay investors interest on the loan just as they would a bank. This new initiative provides the general public with the opportunity to diversify their investments, without being limited by their income or wealth. Also, real estate developers will have access to a new way of financing their projects and ideas, which will stimulate new real estate developments.

Federal regulations generally define an accredited investor as someone with an annual income of over $200,000 or liquid net worth of $1 million. These regulations are keeping the vast majority of Americans out of real estate investing. GroundFloor came up with an interesting and novel strategy. Instead of waiting for new crowdfunding regulations promised by the Securities and Exchange Commission (SEC) that will supposedly allow non-accredited investors to participate in real-estate crowdfunding, the company decided to work within existing state laws. So far, regulators in six states (Pennsylvania, Georgia, Arizona, Illinois, Virginia and Massachusetts) authorized the company’s initiative to solicit residents’ participation in its deals.

GroundFloor’s initiative is granting access to virtually any person interested in real estate investing, regardless of their income or net worth. Anyone can become an investor and the minimum investment is $100. Loan terms vary from six months to five years. As for safety measures, the company has a thorough pre-screening process for developers before they are able to list their projects. Most importantly, the loans are secured by the properties themselves, which is not a feature of other platforms that provide equity in real estate.

GroundFloor concentrates on smaller, residential projects. The pilot project for this whole new real-estate investment philosophy was the renovation of a historical single family home in Atlanta by John Mangham, a successful independent developer. The project was listed in February, and 39 Georgia residents lent the developer $40,000 to complete the restoration. The cash was raised in just five days and the developer will pay to investors 8% interest on the loan.

After the success of the pilot project, GroundFloor has now expanded to five more states (Virginia, Arizona, Illinois, Pennsylvania, and Massachusetts). The long-term goal of the company is to make this type of investment accessible to all Americans.

Other real-estate crowdfunding platforms are relying on wealthy accredited investors to raise money for their projects. GroundFloor, on the other hand, is building a platform for the rest of us, where any investor can access quality real estate investment opportunities. GroundFloor investors will invest anywhere from a few hundred to a few thousand dollars, making a safe investment that will bring nice returns on short to medium terms (from six months to five years). In other words, the company is focusing on a new market, tens of millions of potential investors, and it might just be the boost that the real estate industry and construction industry really need to make a recovery from the recession.

This type of real estate investing comes with a series of advantages for both developers and investors. Developers gain access to funds more rapidly: let’s remember that the funds for the pilot project in Atlanta were raised in just five days! Also, the developers are no longer dependent on financial institutions or accredited investors, which allows them more flexibility and creativity in their projects. Investors, on the other hand, have access to a form of investing that is safer than stock market investing and more profitable than depositing money in a bank.

One more thing worth mentioning: this form of financing is a way of bringing ethics back to real estate. Communities are offered the opportunity to back up projects that bring them something valuable, instead of dealing with real estate projects drawn by huge corporate developers who are far removed from the needs of the community.

GroundFloor makes investing in real estate projects accessible to anyone, building the path to a new way of financing the real estate industry – more flexible, more transparent, more dynamic, and more importantly: open to all.

David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft – The Voice of Capital Formation – a global financial media company with divisions in Corporate Communications, Publishing and Expos & Events. You can reach him directly at David@LDJCapital.com.

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Raising Capital or Investing? Here is what you need to know about Intellectual Property & Due Diligence

Rob McInnes - Dibbs Barker

Rob McInnes – Dibbs Barker

Rob McInnes is a Partner at Dibbs Barker in their Intellectual Property Group. He advises established businesses, start-ups, research organisations, and investors in matters relating to the commercialisation of novel technologies, and in the intellectual property-related aspects of major projects and transactions. He is a specialist in the structuring and negotiation of patent licences, collaborative research agreements, and other contracts for the development and commercialisation of innovations.  

Rob is also the highest ranked Australian attorney in the Intellectual Asset Management Global 1000 – World Leading Patent Attorneys. (Ed: I have used Rob in the past and can highly recommend him)

If you need help with any IP or transactional matters you can contact Rob here

Rob shares what he typically advises investors when considering investments in technology based companies. If you are a startup seeking funding or an Angel Investor investing in technology companies these are the key issues you should consider.

Note: The information in this document, broadcast or communication is provided for general guidance only. It is not legal advice, and should not be used as a substitute for consultation with professional legal or other advisors. If you require advice on your specific situation you should direct them to Rob directly.

Purpose

The purpose of an IP due diligence review for an early stage technology investment is to seek to identify, using appropriate methodology and at an appropriate cost, material issues relating to defects in the ownership, validity, scope or maintenance
of an IP portfolio.

A due diligence-type review will also be useful in providing confidence in a company’s intellectual property position for the purposes of licensing, collaborative research or other partnering transactions.

An abbreviated due diligence such as that outlined in this document will not identify every material issue that might subsequently be identified in a formal merger or acquisition or IPO due diligence, in which much more resources will be
invested.

More detailed due diligence investigations can be scoped and undertaken as appropriate if resources are available.

Reaching an appropriate level of comfort from an IP perspective is critical for any substantial investment in a technology venture, and the scope of the early due diligence should anticipate the type and intensity of due diligence to be expected at the time of exit from any investment, whether it be by trade sale, further investments by third parties or IPO.

Principal questions to be answered

At the broadest, there are four questions that are central to any intellectual property due diligence review. These are:

  1. What technologies and intellectual property rights fall within the portfolio of intellectual assets that will be “sold” to the merger partner/acquirer/licensee etc on exit?
  2. Does the company own those intellectual property rights – or if it does not own them, are the owners of those rights able to grant to the company sufficient rights to commercialise them?
  3. How likely is it that those intellectual property rights will proceed to registration (in the case of pending applications) and are valid (in the case of granted rights)?
  4. Does the company have reasonable freedom to exercise those intellectual property rights and to commercialise those technologies?

What intellectual property rights should be investigated?

This initial phase of the review is required both for the planning and scoping of the review, and for the reliable estimation of likely costs involved in the review.

It involves interviewing key executives of the company to determine its own understanding as to its most important intellectual assets.

It also involves review of publicly available IP registers, past information memoranda (if any), reports to shareholders, investor presentations, web site and other publications, any internal register of intellectual property, and ASIC filings by the company.

From this initial phase of the review those technologies that appear to be material to the operations and value of the company should be identified.

Some of the intellectual property rights relating to the technologies may have been licensed by the company from the owner(s) of the relevant intellectual property (for example, universities or research institutions), under one or more licence agreements that will define the intellectual property rights licensed to the company.

While the licence agreement(s) will set out the licensed IP, they will not answer the question of whether all relevant intellectual property rights generated within the licensor organisation(s), which are necessary to commercialise the licensed
technologies, have been included within the licence(s).

It may sometimes be prudent to assess the research output of the relevant research groups within the licensor(s) of licensed IP, to determine whether any other intellectual property developed by them should necessarily or desirably have been included with the licensed IP and made available to the company. This assessment would be based on the scientific publications and any patent filings of the relevant researchers and their institutions. A particular focus would be to identify additional technologies developed within the research institutions that could effectively compete with or enhance products based on the licensed IP.

Does the company own or have sufficient rights to commercialise the technologies?

Answering this question involves an examination of the registered ownership status of the relevant intellectual property applications and granted rights, but it necessarily goes further than this.

Identifying the correct inventors
Inventorship is important in the case of patents and patent applications. If a person made an inventive contribution to an invention but has not been named as an inventor in a patent application, any resulting patents will effectively be unenforceable, at least in the United States.

Further, in most jurisdictions they will not be able to be validly commercialised through licensing without the consent of the unnamed inventor. We recommend a review of each family of patent applications within the relevant technologies, with a view to determining whether the inventors have been correctly named.

Such a review would ideally involve inspection of all original laboratory notes, but the cost of this inspection (at least where the relevant records are in the possession of licensors and not under the control of the company) may be prohibitive. A reasonable impression as to correct inventorship can be gained by interviewing the inventors and reviewing any published papers arising from the relevant research activities.

Establishing chain of title

Once the inventors of the relevant intellectual property have been identified, it is necessary to confirm the employment status of those inventors, as (speaking in general terms) inventions made by an employee in the course of their employment initially become the property of the employer.

It is then necessary to identify any contracts relevant to intellectual property ownership that may have been entered into by the employer, such as contracts governing the funding of the research that gave rise to the relevant intellectual property.

Determining rights under licence agreements

Having identified any licensed technologies and licensed IP, it is then necessary to determine whether the relevant licence agreements grant to the company sufficient rights in the licensed IP for it to pursue its business plans and strategies, and to
determine whether those rights are sufficiently broad and transferable such that the relevant agreements will not become a disincentive to any potential merger or acquisition partner.

Any issues with title or licence agreements can then be brought to the attention of the relevant licensor(s) and an attempt can be made to renegotiate existing agreements or to put in place new agreements to address those issues.

Validity of the relevant intellectual property

Commonly most or all of the relevant intellectual property is not protected by granted patents, but remains in the form of pending patent applications which may or may not proceed to grant.

It is clearly important for the company to come to a view about the likely prospects for protection of the relevant intellectual property through the grant of patent rights. Any valuation of the company will necessarily be heavily influenced by the likelihood of securing strong proprietary positions in its technologies.

Ideally, any assessment of the prospects for the grant of any patent application and the validity of any resulting granted patent would involve professionally conducted searches in all important jurisdictions, to search for prior art that may result in a pending application not proceeding to grant, or in a finding of invalidity of a granted patent if it is challenged.

However, the cost of such an exercise may not be regarded as justified in an early stage transaction. It may be preferable to limit the proposed review to an examination of the company’s own intellectual property files, and the files maintained by its patent attorneys, relating to the relevant patent applications and granted patents – the so-called “file wrappers”.

These files may contain search results from official searches carried out by Patent Offices around the world, and may also contain the results of searches carried out previously by the company or its patent attorneys, either internally or using external contractors.

It is possible that in reviewing file wrappers relevant to an invention, search results will be found that may impact on the company’s freedom to commercialise the invention, but it is important to recognise that searches carried out to determine whether a patent application should proceed to grant, or to determine the validity of a granted patent, are not directed at finding third party intellectual property rights that impact on the applicant’s freedom to commercialise the invention.

Accordingly, while a “clear” search result indicates that a patent application is likely to proceed to grant, it gives no indication as to whether the applicant will be free to commercialise the invention. Further, searches conducted by Patent Offices in different jurisdictions vary widely in quality, and the fact that a Patent Office was unable to locate prior art relevant to a patent application does not mean that that prior art cannot be used subsequently to attack the validity of a granted patent.

Freedom to Operate/Freedom to Commercialise

Being in possession of technologies protected by intellectual property rights is not of itself sufficient to guarantee that a company will be able to commercialise those technologies successfully.

Obstacles to such commercialisation in the context of an intellectual property review may typically be divided into two types;

  • Constraints imposed by the intellectual property rights of third parties (typically referred to as “freedom to operate” issues),
  • Constraints imposed by contracts entered into by the company, earlier owners of the relevant intellectual property, or licensors of the relevant intellectual property.

Freedom to operate

Typically, in the case of Australian technology companies whose technologies are sourced from the public sector, these latter constraints will be imposed by funding conditions applicable to the various government schemes benefiting either the company, or the public sector research institutions that developed the technologies.

In the case of technologies used under licence, they will also be imposed by the relevant licence agreements.

Lack of freedom to operate can of course have a devastating effect on the valuation and commercial viability of any technology company.

Biotechnology companies are particularly vulnerable given the crowded nature of the intellectual property landscape in this field, and the enormous investments in intellectual property rights made by larger players such as multinational pharmaceutical companies and established overseas biotechnology companies with relatively deep pockets and an aggressive tactical approach to securing intellectual property rights.

Other fields of technology are increasingly affected by freedom to operate issues, as major players and new entrants alike seek to establish or defend proprietary positions.

Early stage companies in areas where patent activity is increasing rapidly, such as ICT and financial services, are now as likely to be threatened by third party patent rights as life science companies.

While the costs of having freedom to operate searches carried out in all important jurisdictions in respect of all the relevant technologies will be beyond the scope of early stage due diligence, it is recommended that the issue of freedom to operate
should not be ignored.

Relatively simple searches on the intellectual property rights of known competitors of the company, and on members of research teams in the relevant research fields identified by the company, can be carried out using free internet searching facilities. Such searches can be limited to the major jurisdictions of the USA and Europe and the Patent Cooperation Treaty application database.

However, such general advice could not be relied upon as a “signoff” as to the company’s freedom to commercialise any particular product – rather, it would set the scene for an informed risk assessment.

Constraints on commercialisation under contracts and funding conditions

Apart from constraints imposed directly on the company under its licence agreements and other contracts to which it is a party, there may also be indirect constraints arising from past conditional funding of the development of the relevant technologies.

For example, the commercialisation of a technology developed with most forms of Commonwealth funding must be carried out “for the benefit of Australia”, and certain requirements for Commonwealth consent apply under many funding schemes.

General review of IP management procedures

Any party carrying out due diligence on a technology company will be likely to form a general impression about the company’s overall intellectual property management procedures.

For more sophisticated merger or acquisition partners the quality of the company’s intellectual property management generally may be relevant to valuation, given that evidence of sound intellectual property management within the company will lead to a lower perception of risk.

In the course of a review, information about the company’s intellectual property management procedures generally should be gathered, and reported at the end of the review with suggestions for improvements.

Non-patent intellectual property rights

The analysis and recommendations above focus primarily on inventions protected by patents or patent applications – these are usually the most important intellectual property rights relevant to a technology company, especially if it has no products on the market.

In the course of reviewing the relevant materials for issues relevant to patent rights it is also useful to advise on issues relevant to non-patent intellectual property rights such as trade marks, copyright and domain names, should apparently material issues arise.

It is recommended that the due diligence should at least involve trade mark searches to confirm the registration status of the company’s corporate trade marks in its major markets, and to identify potentially competing trade marks of third parties.

As a first step a review of the file wrappers relating to any trade mark registrations applied for or obtained by the company
should be undertaken.

Summary of possible due diligence steps

  1. Initial scoping, identification of relevant technologies including licensed
  2. technologies, review of research output of research groups within licensor
  3. institutions to identify any additional technologies or intellectual property
  4. rights that necessarily or desirably should have been licensed to the
  5. company.
  6. Interview inventors with a view to determining correct inventorship.
  7. Review employment agreements and other agreements relevant to title
  8. such as collaboration agreements.
  9. Review licence agreements to identify scope of grant and any unusual or
  10. onerous restrictions on the rights of the company.
  11. Review patent application file wrappers for issues relevant to likelihood of
  12. grant, and patent validity.
  13. Conduct abbreviated freedom to operate searches based on known
  14. competitors and research teams, using free internet searching facilities.
  15. Review any funding agreements or other applicable agreements and advise
  16. on constraints on commercialisation rights.
  17. Review trade mark file wrappers.
  18. Conduct trade mark registration and availability searches.
  19. General advice on intellectual property management procedures.

 

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More insights from launching Cloudherd.com- Alex Stamp

This is the third article in a series of articles from entrepreneurs that have been through Incubate, the University of Sydney Incubator program. Alex Stamp launched Cloudherd.com along with Mike Titchen and Luke Fries in 2012 as the first group of businesses in the Incubate program. Cloudherd is trying to solve the problems that farmers face when trying to sell their cattle, it’s a very inefficient market that seems to be stuck in the 1900s and Cloudherd is trying to drag it into 2013 with an online Auction system and cattle inventory application. The first article is here Launching Cloudherd.com and the second article is here Start-up execution @Cloudherd.com

 

So the third article in this series slipped. I suppose that as a hard charging, networking, all-singing, all-dancing entrepreneur it is a bit hard to finish three long form articles in three weeks.

I’ve also been having chronic laptop overheating problems with the recent warmer weather, so much so that I couldn’t even watch YouTube the other day unless I wanted my computer to turn into a kettle. The reality was that although I may have had the spare hour or two I would have needed to get this article out, I just didn’t. I’ll try to make up for that.

To round off my series of articles, which some have described as “bad”, “confronting” or somewhat favorably as “a sledgehammer of honesty to the face”, I thought I would talk about what not to do.

Lots of entrepreneurial articles essentially consist of generic buzzwords and lists and end up being “The four things about big data you have to know” or some equally banal piece of outsourced tripe. My list is better, maybe, since I wrote it myself and there are substantially more than four points, though some of them may be elegant ways of restating what I said in previous articles.

Team

Investors are always obsessed with the team, here is what not to do,

  • No one loves your idea as much as  you. If the idea is kind of your baby then don’t necessarily expect your other founders to work as hard as you or be as passionate about the business as you. They may not necessarily care about organic dog food, or whatever it is you are doing, but they’ve still agreed to work for no money and the Russian roulette of compensation known as equity. Respect that.
  • Glossing over tech issues. I see a fair number of young founders doing this particularly grievous sin. They get one guy on the team to learn PHP and they then brand him as the tech guy and gloss over all technical issues. You will get found out if you do this and it is embarrassing, admit what you don’t know and at least try to start your tech guys off from some tangentially related field, like embedded systems.
  • Your history probably doesn’t count. Don’t think that anyone will think you are a red-hot startup founder just because you did an internship at PwC, Deloitte or Random Professional Corporation #528. Everyone knows that your job was close to that of a monkey’s, except monkeys cost more to feed and house. If you weren’t a monkey then don’t expect anyone to believe that, you unfortunately have to prove yourself when you are a young entrepreneur.
  • Create a learning team. Your team’s skill base will affect how long it takes you to execute a given set of tasks but in the end what will determine the most valuable members of your team is how much they are willing to learn. Always be learning, and not selling. If you’re selling, you’re not learning anything about your customer, investor or partner. Socratic dialogue can be very powerful.

I’m also assuming that most of my audience is people thinking about starting a tech start-up, not organic dog food, and as such I’d like to also present some points about the small amount of technology implementation that I know and participate in.

prototype  inventory module

 

Tech

  • Patents.Don’t say your technology is patentable as you are lying in an obtuse manner. Anything is patentable in the US, including Amazon’s stupid one click shopping cart, put enough claims in and you can probably get a patent. If you invented cold fusion, or a way to stop cows from emitting methane, then maybe you can patent it but it will end up costing you a lot of money to protect it.
  • Algorithms. Stop running around like a parrot who has drunk a coffee, clucking about how your advanced analysis and algorithms will give you an unassailable competitive advantage. Not only do your competitors likely have the same data, if not more, they also have smart people working for them who can probably reverse engineer your algorithm or features. Furthermore your advanced algorithms which are likely to be slightly more complex versions of existing common algorithms,so you should use standard deviation to figure out outliers and then throw them out. I know a civil engineer who just wrote a GPS tracking algorithm to get rid of junk data; if he can do it, so can your competitors. All of which begs an interesting question, why do so many people use all the same statistical models?
  • No one will understand for a long time. If your technology is actually valuable no one outside the industry, nay maybe even a few people inside that industry, will actually understand what you are doing and how you are doing it. Expect lots of blank looks as you tell people about the complexities of serving genetic data from databases and that being why you had to partner with another company. Most people will never even bother to learn about this stuff even if you tell them about it.

Investors

I’ll finish on investors, as most startup founders will talk to them many hundreds of times during their lives. Investors give you fuel to burn and can bring a lot to the table; that said there are lots of things that you shouldn’t do:

  • Don’t spend too much time talking to investors. Outside of certain investor markets capital availability can be very poor and as such you should spend a lot more time executing than you should trying to hustle investors. If you can get a few paying users then you will be in a lot stronger position to talk to them; not that that is easy. Without any seed funding it can be extremely difficult to launch to certain markets.
  • Trust & Alignment. Don’t necessarily trust investors that don’t make their living from the startup scene. They won’t think twice about screwing you because their reputation isn’t their way of putting food on the table. Break out the NDA. (ed not sure I agree with this one, it just depends on the individual)
  • Persistence. Don’t think that investors will understand or even be interested in your idea based off one pitch session. There can be a lot of brutal, hour-long discussions about the ins and outs of the business on a microscopic level which will leave you exhausted before they even think about term sheets. That first pitch might even be a disaster, but don’t write things off as you might still have a chance to impress.
  • Do your own due diligence. Don’t be afraid to look into potential investors, you might be surprised what you find…..

Anyway, thank you for reading through my series of articles and I hope you found them amusing and useful. Though at times I may seem harsh I just wish to dispense with this American entrepreneur style of things that seems to affect some young entrepreneurs; they think that they will pump out a few weeks of code and then get funded to the tune of several million dollars.

This is not likely to happen in Australia and I encourage those thinking of starting a business to be realistic about what they hope to achieve. If you would like some more advice there may be a few more articles in future, and I’m always available to help if you connect with me on LinkedIn http://au.linkedin.com/pub/alexander-stamp/44/582/917/

 

 

 

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