Insiders are jumping ship in the the 19-year-old company as profits decline and a failure to produce a market-ready product in nearly two decades.
Ah yes, another startup using Reg A to cash out insiders despite bleeding money and having no clear path to an exit for everyone. Liquid Piston has seemingly been a crowdfunding favorite with several successful raises, including raising over $17 million on StartEngine (where they also successfully cashed out millions for insiders). They make their own take on a Wankel engine, but rather than one combustion per rotation, theirs makes three. If successful, their engine would be significantly more fuel efficient than normal internal combustion engines, as well as a host of other benefits. However, that’s not really the point of this article.
The point is this consistent theme of insiders using Reg A to pawn off the stock to the unsuspecting via social media ads despite realistically being ages off from an exit for everyone. Dozens of founders do this as they pat themselves on the back for turning millions of dollars of investors' money into thousands of dollars in revenue while subsequently taking six-figure salaries.
What is Sales by Selling Stockholders?
Sales by selling stockholders is a mechanism by which companies launch a Regulation A campaign, but set out a portion of the funds to go directly to insiders (CEO, CFO, and similar acronyms), and they pocket the money, rather than the money going to the startup. Typically when a startup opens a funding round, it’s so they can take in more money to sustain and ramp up operations. Ideally, a company raises a seed or pre-seed round, then uses that money to fund product development and getting to market. After that, companies typically raise money for marketing and expansion to roll out alternative revenue streams and ramp up revenue.
However, if a company has a “sales by selling stockholders” plan in their offering circular, that means a portion of the money raised will not go to the startup at all. It will go directly into the pocket of whoever is selling the stock, and they keep it as an extra multi-million dollar payday… for being able to run Facebook ads.
Why is this an issue?
Sales by selling stockholders isn’t an inherently bad provision because it could have some real uses. However, like anything ripe for abuse, that is rarely what it is used for. In reality, it’s generally being used by insiders to cash out their company because they can’t get it to work to the point where they can scale to an IPO.
For example, let’s take a look at Liquid Piston. Liquid Piston has been around since 2003 and was incorporated in 2004, so it’s coming up on 20 years old, and they still don’t have a production product. In those 19 years, all of their revenue that I can find has come from government research contracts, or consulting services…not actually selling a product. They claim to have $30 million in contracts… again… for research and consulting… not sales. While they have prototypes for their products, I cannot find anything indicating that they produced and finished a scalable & market-ready product in those 19 years.
During that time, they produced about $10 million in revenue (based on SEC filings from 2016–2021) from research grants and consulting services, but still sitting on a $26 million loss. Meaning to produce that $10 million in revenue, they lost $26 million. Even though their recent fiscal year has increasing revenue from government contracts and consulting, they are still losing more money. In 2017, they had $3.2 million and a slight profit, since then, it’s been on the decline.
In 2018, they had $2.8 million in revenue and an $825k loss. In 2019, they had 2 million in revenue and a $1 million loss. in 2020, they had 425k revenue and a $2.9 million loss. In 2021 and 2022, they increased revenue slightly but still bleeding money. In 2021, they had $2.6 million in revenue and a $1.8 million loss, and their most recent audit shows $3.5 million in revenue and a $63,000 loss. Which, again, is “primarily from government contracts”
So, despite widening losses, they jacked up their valuation by over double to a whopping $184 million, AND insiders are offloading their stock. Sounds like a winner if I ever heard one.
So, let’s recap:
In nearly 20 years, they have lost $26 million of investor money, have no scalable & market-ready product, declining profitability, and currently sitting at 70x revenue. The insiders looked at the state of the company and thought, “We really deserve ANOTHER $7.5 million payday.” This is money in addition to the CEOs $220,000 cash salary, CTO’s $222,000 cash salary, and so on.
If you want to sell stockholders, then why don’t you get some ACTUAL SALES so you can IPO and everyone can get liquidity (I am not a shareholder, ‘everyone’ is just referencing the thousands of investors they have recruited from Facebook ads.)
How this could end poorly
Let's preface this by noting that the world economy is experiencing turmoil, and we are currently in a recession. While liquid piston’s cash position is seemingly strong for now, they’ve been burning money for 20 years. Their primary income is from government contracts in a time when government contracts are becoming less available. They have no pre-sales that I can find for this and are developing a new engine in a world where electric vehicles are taking over. If they go out of business, all of those thousands of investors investing millions of dollars lose all their money. That is a risk they took, but then imagine learning that while everyone else lost their money, the founders took a $10 million payday between this raise and the last. That’s $10 million that could have sustained them for another couple of years and maybe gotten them to market.
Liquid Piston raised one of the largest equity crowdfunding offerings ever. Every time you have a company where people end up upset, lose money, feel like they got scammed, and so on, less people will invest through equity crowdfunding. Sure, a bunch of scumbag founders make out like kings, but the rest of those people leave, and they don’t come back. Sometimes it can’t be prevented. A lot of companies have IPO’d then shot up on Day 1 only to plummet into oblivion. You can’t really help that. You can help this. Platforms could stop allowing this, or founders could just have some basic self-respect and not do it, or at least do it in a Reg D with accredited investors.
Not to mention, they’ve been grifting off of other people's money for 20 years and don’t even have a product. What did they do to deserve a $10 million payday? If they want it, then get some sales and IPO, or at least don’t take the money from people you found through running Facebook ads. If you can’t get it to that point, take your company, and punt it into the ocean. Have some self-respect.
I know I am giving Liquid Piston a lot of grief here, but this is going on everywhere. Let’s take a look at some other grifters and how well their companies are performing:
KingsCrowd: Despite losing $3.9 million dollars to produce $497k in revenue in the most recent FY, the CEO of KingsCrowd, Christopher Lustrino, felt he deserves a $1 million bonus from selling stockholders for increasing YoY revenue by a staggering 2%, and widening the loss from $1.3 million to $3.9 million to do it. Nantascot, a founding LLC of KC, similarly cashed out $1 million in their most recent round.
JetToken: Jet Token is similarly just knocking it out of the park. In their first year of substantial revenue for their product (2021), they managed to produce $1.1 million in revenue in 2021, and they only lost $15.7 million to do it! In 2020, they produced $4,783 in revenue and lost $2.5 million. The Jet Token team, in addition to their $388,000 and $250,000 cash salaries, also felt like they deserve a $3 million bonus from selling stock as well.
StartEngine also did it, and is currently doing it as well, and I similarly called them out a while ago. It’s lame and sets a bad precedent. Fortunately, StartEngine is profitable at least and set up pretty well. Boxabl also did it, but I have no problems with how they did it. They did it primarily through accredited investors, and there was an opt-out feature. As well, the sales didn’t kick in until they raised a certain amount, and several other investor protections. Not to mention Boxabl produces hundreds of thousands in revenue a day at least. There are likely others besides these ones, but these are the only ones I can immediately think of.
As a bit of a closing thought, I throw these salaries in there because often times people defend this by saying, “Founders should get paid too!” I completely agree, they should. I don’t even mind seeing a founder making a six-figure salary, as they are often worth it. That’s not what this is. If a founder is now on their SECOND multi-million dollar bonus, and the combined bonuses are larger than the lifetime revenue of the company, you’re just looting the company and getting rich and selling worthles