Just one year ago, entrepreneurial investors celebrated the kick-start, if you will, of investment via crowdfunding. They’d been waiting awhile, as President Obama signed the Jumpstart Our Business Startups Act in 2012, which allows companies to fundraise online the same way starving artists have done since 2009.
But if startups toasted the moment, it was more likely with plastic cups full of Three Buck Chuck than champagne. The JOBS Act’s Title III is aimed at non-accredited investors: little-guy, small-fry types with a net worth of less than $1 million (which no doubt includes all the starving artists).
So what made headlines in May 2016 now faces something of a dead silence in June 2017. That either means other big stories have displaced it, or that crowdfunding simply isn’t news anymore: more an investment curiosity than opportunity.
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“Congress, in passing the JOBS Act with provisions for equity crowdfunding, may have overestimated public interest,” says Len Rosenthal, a finance professor at Bentley University in Waltham, Massachusetts. “They probably were also caught up in the hoopla around equity crowdfunding.”
“Equity crowdfunding remains problematic,” adds Ian Atkins, financial analyst and staff writer at FitSmallBusiness.com. “It’s not the first choice of entrepreneurs when they’re thinking of raising capital. It’s not the first choice of investors, accredited or otherwise, when they’re thinking of investing in a startup. With neither entrepreneur nor investor making equity crowdfunding their first choice, you’re setting up a model that’s destined to disappoint both.”
Experts inside the Beltway acknowledge that the green light from lawmakers hasn’t yet added up to blue skies for companies on the hunt for cash.
“The dollar limits and level of regulatory burden are making it difficult for startups to use Title III,” says Dina Ellis Rochkind, a lawyer at Paul Hastings and a lead Senate staffer during the JOBS Act’s formative period.
Rochkind say that Congress and the Securities and Exchange Commission need to fine-tune a key component known as Regulation CF “to make it more user friendly. Instead, companies are using Regulation A+, which is an ‘IPO-lite’ for crowdfunding from retail investors. To date, about 140 startups have used Regulation A+.”
With an estimated half million startups launched every year in America, 140 startups funded via Regulation A+ might seem like an F grade for equity crowdfunding. Not so fast with that grade, observers say.
“Despite the hurdles, I’m confident the industry will continue to grow as more people are educated about the process, and as Congress and the SEC tweak the laws and rules,” says District of Columbia-based attorney Kendall Almerico, CEO of BankRoll Ventures. “Would you rather donate and get a T-shirt, or invest and own stock and still get the same T-shirt? Equity crowdfunding is generally far more attractive than rewards crowdfunding.”
Other observers concur.
“Certainly more education needs to take place to increase awareness and to get investors more enthused,” says Gary Anetsberger, CEO of Millennium Trust Co. in the Chicago area. He cites real estate as an example of one hot investment sector that has thrived “due to a high level of awareness and comfort with that area.”
The comfort-level question just as much applies to companies seeking funds. And at least one company in the comfort business that hopes to raise about $2 million is taking a very close look at crowdfunding.
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“Crowdfunding is simple and easily accessed in the U.S., so we’re strongly considering it instead of going the traditional route with private investors or venture capital firms,” says David Galle, CEO and co-founder of Colorado-based Nolah Mattress, a self-described “sleep technology” startup. Its air foam mattress, ordered online, ships in a box the size of two mini-fridges.
Here from Europe on an “investor visa,” Galle hopes to keep his business here, and funds via the JOBS Act could prove crucial. “It’s intriguing for us that many small investors can get a part of our success,” he says. “We think crowdfunding is a great concept as it gives small investors the opportunity to make a big 10- to 20-fold return on their small initial investment.”
To be sure, equity crowdfunding is meant to reach the Mom-and-Pop crowd Galle talks about. Prior to the JOBS Act, only accredited investors — those with a net worth of at least $1 million — were allowed to back private companies. That was the law of the land ever since the Securities Act of 1933, when Franklin D. Roosevelt was in the White House.
Yet investments aimed at everyday people also raise the danger of scammers who seek out the unsuspecting and unsophisticated. This in part led regulators to take their time turning Title III into reality.
“So far, there have been no significant cases of scams,” Rosenthal says. Yet that could be bad news as well as good, “since there has been little money raised so far.”
Despite protective measures built into equity crowdfunding, including “bad actor” disqualifications, “the ease with which investors can buy equity — and the fact that non-accredited investors are the target audience — creates the potential for fraud,” says Glenn Stein, member, Chiesa Shahinian & Giantomasi in West Orange, New Jersey.
And so given that crowdfunding isn’t foolproof, the newest of investment wrinkles still hews to timeless investment advice — check it out before you write the check. That said, some insurance companies have pivoted with the times.
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“They now offer insurance products to crowdfunding platforms aimed at protecting investors from issuer fraud,” Stein says. “Perhaps we’ll soon see this as a value-add offered by more and more crowdfunding platforms as the concept matures.”
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Why Equity Crowdfunding Hasn’t Taken Off originally appeared on usnews.com
