Crowdfund investing proves no bonanza
Regulations considered an impediment
NEW YORK • Begun two years ago with some big hopes, the option for small businesses to court investors through crowdfunding hasn’t turned into the windfall its supporters predicted.
“A lot of dollars have been raised in crowdfunding, but it has not been the bonanza people have been expecting,” says David Lavan, a former Securities and Exchange Commission attorney who’s now with Dinsmore & Shohl in Washington, D.C.
Some 438 companies have raised US$105 million since May 16, 2016, when the first websites where companies’ shares are sold began operating, according to the consulting firm Crowdfund Capital Advisors. There are now 41 sites. On one, Wefunder, businesses have raised US$15 million in the last 18 months, but that’s about half the amount hoped for.
Another disappointment: About half the investors are customers of the companies and want to support their favourite brewer or app maker or back a movie project — they’re not the average small investors crowdfunding was supposed to appeal to.
“There’s not a lot of people out there saying, ‘Gee, we want to invest in startups,”’ says Nick Tommarello, CEO of Wefunder.
Some of what’s held crowdfunding back are legal limitations and requirements, designed to protect investors who may be unfamiliar with the risks of committing money to young companies without proven track records.
Companies can raise up to US$1 million, and individuals with income or net worth under US$100,000 can invest a total of US$2,000 in one or more businesses in a 12-month period. Businesses must comply with Securities and Exchange Commission requirements including financial and disclosure documents, although the paperwork is far less than what companies complete when they’re going public
Daplie, a maker of computer servers that’s based in Provo, Utah, has done two successful crowdfunding campaigns that have helped the company avoid traditional venture capital investors and be more independent, president Brian Bourgerie says.
“If we can crowdfund our way to an IPO (initial public offering) or whatever success, that’s the way we’d like to do it,” he says.
But people involved in crowdfunding say the regulations prevent it from becoming a windfall for young companies. Businesses still need legal and accounting help to prepare documents and financial statements. The tens of thousands of dollars that may cost can eat into the money they raise, says Ryan Feit, CEO of SeedInvest, another crowdfunding website.
“It’s a significant regulatory burden imposed on very small companies,” he says.
Preparing for an offering is also a lot of work on top of already running a company, Bourgerie says.
“You have to come up with a marketing plan, interact with investors and customers, like a mini-business. It’s not something anyone should just jump into,” he says.
The US$1 million limit on money raised also is a potential problem. Some companies can easily reach it. And those that surpass their goals, even if they’re below US$1 million, are required to turn away investors who try to sign up after that total is met.
IT’S NOT SOMETHING ANYONE SHOULD JUST JUMP INTO.
When Ron Wilson’s athletic wear company, Hylete, aimed to raise US$1 million last year, it got US$1.3 million in offers for its shares.
“We couldn’t take the other US$300,000. Our customers were upset,” says Wilson, whose company is based in Solana Beach, Calif.
Many small companies bypass crowdfund investing and raise money instead on sites like Indiegogo and GoFundMe that don’t require paperwork and that have no limits. But having investors is appealing to Justin Shelby, CEO of Artichoke, which sells an app to help business owners manage their companies. Investors who are excited about the company, including those who are customers, become ambassadors for its brand, he says.
Artichoke’s first campaign attracted 81 investors and US$51,885, nearly half its US$107,000 goal; Shelby was satisfied with the amount.
The company is in Baltimore, far from the technology investor hubs of Silicon Valley and New York, but crowdfunding isn’t dependent on geography. “Because it potentially deregionalizes access to capital, it could be a game-changer for a lot of companies,” Shelby says.