Below is an article by the St. Louis Post-Dispatch entitled "Nicklaus: Entrepreneurs and investors should approach crowdfunding warily"
Nicklaus: Entrepreneurs and investors should approach crowdfunding warily
By David Nicklaus, St. Louis Post-Dispatch
November 6, 2015
Sometime next year, your social media accounts may be flooded with opportunities to invest in everything from a technology startup to the local microbrewery.
It’s called equity crowdfunding, an idea that created a lot of excitement in 2012 when Congress passed the Jumpstart Our Business Startups Act. Backers of that law, called the Jobs Act for short, envisioned a democratic fundraising system where entrepreneurs’ dreams would no longer be at the mercy of powerful venture capital funds.
Last week, the Securities and Exchange Commission finally issued 685 pages of crowdfunding rules, which won’t take effect until after a 90-day comment period and final vote. Now that they’ve seen the regulations, experts wonder whether the capital-raising process has been revolutionized or merely tweaked.
The SEC, with its mandate to protect investors, didn’t want mom and pop risking their life savings based on a few sentences of Internet hype. So, the agency won’t let people with income and assets of less than $100,000 invest more than $2,000 or 5 percent of their net worth, whichever is greater, in crowdfunding deals. Wealthier folks can invest up to 10 percent of their funds, but no more than $100,000 in a single year.
The SEC also is requiring financial statements and other disclosures, and allowing offerings of up to $1 million only on a registered crowdfunding platform. Firms raising more than $500,000 will need to get their statements audited.
Cliff Holekamp, a partner at Cultivation Capital who teaches an entrepreneurship class at Washington University, advises founders to approach the new rules warily. If you pitch your company later to traditional venture capitalists, he said, they may not want to deal with dozens of $2,000 investors who backed your crowdfunding campaign.
“I’m advising my students and entrepreneurs I work with to stick with the old rules until we learn how the new rules are going to play out,” Holekamp said. “But the more options we can provide for entrepreneurs, the better.”
Matthew Kitzi, a securities lawyer at Armstrong Teasdale, says crowdfunding may work better for a traditional small business, such as a shop or restaurant, than for a technology or pharmaceutical startup.
“A microbrewery or a new consumer product, those are more community-based companies that could benefit from this,” Kitzi said. “I don’t know that the next Facebook is going to get its start by using equity crowdfunding.”
Technically, crowdfunding already exists on the Internet, with plenty of websites promising to connect entrepreneurs and investors. Until the new rules go into effect, those investors have to have incomes of at least $200,000 or assets of $1 million.
EquityNet, one such network based in Fayetteville, Ark., intends to apply to become a crowdfunding portal under the new SEC rules. Patrick Moss, the site’s director of public relations, says EquityNet has 20,000 registered investors and has helped entrepreneurs raise $115 million in the past 12 months.
He expects those numbers to swell when the new rules take effect. “There may be a slow start, but this will ultimately end up being a very large market,” Moss says. “It’s a very exciting opportunity for the everyday investor.”
How that opportunity will turn out is not yet clear. Most advisers would say a person of modest means has no business investing in risky startups. If you’re an average Joe or Jane who thinks you have a bit of business savvy, though, plenty of entrepreneurs will soon be lining up to ask for your money.