Want to in­vest in the next big thing? Now you can

A new fed­eral rule opens the door to what’s known as eq­uity crowd­fund­ing.

Los Angeles Times - - BUSINESS - By Paresh Dave

Start­ing Fri­day, you’ll be able to in­vest online in pri­vately held com­pa­nies that could be the next Snapchat Inc. or Tesla Mo­tors Inc., and you won’t even have to be rich or well-con­nected to take ad­van­tage.

A new fed­eral reg­u­la­tion has loos­ened a Great De­pres­sion-era re­stric­tion that lim­ited op­por­tu­ni­ties for peo­ple with­out sig­nif­i­cant wealth to pur­chase pri­vate shares.

The new rule could mean more lu­cra­tive prospects for busi­nesses that have had dif­fi­culty scor­ing cap­i­tal from ven­ture cap­i­tal­ists and other rich in­di­vid­u­als, and in­stead open the door to rais­ing money from loyal, early fans.

“The changes are the great­est ad­vance­ment for entrepreneurship in a gen­er­a­tion,” said Ron Miller, a Los An­ge­les ven­ture cap­i­tal­ist who as an en­tre­pre­neur had to raise cap­i­tal through credit cards, bank loans, cor­po­rate in­vestors and Nas­daq pink sheets. “This is open­ing up a whole new op­por­tu­nity.”

Thanks to the new rule, which stems from the 2012 JOBS Act, start-ups can is­sue shares to any­one — rais­ing as much as $50 mil­lion in the process — as long as the com­pa­nies com­plete ex­pen­sive fi­nan­cial and le­gal pa­per­work.

How many start-ups will ac­tu­ally pur­sue the av­er­age­Joe or av­er­age-Jane in­vestor is un­cer­tain.

“Ini­tially, you think this is go­ing to be the best thing in the world,” said Bill Clark, chief ex­ec­u­tive of online in-

vest­ment ser­vice Mi­croVen­tures. “But when you read it closely … it’s not go­ing to be wide­spread. There’s just too many reg­u­la­tory is­sues.”

Specif­i­cally, tak­ing in­vest­ments from the wider public trig­gers ex­tra dis­clo­sures and re­port­ing, and some fi­nanc­ing ex­perts ex­pect only a slim class of en­trepreneurs will want to spend more on con­sul­tants to han­dle it.

Xreal, a new mo­bile game pub­lish­ing com­pany in Santa Mon­ica, is giv­ing it a shot. The com­pany, started by YouTube star Jor­dan Maron and Ac­tivi­sion Bliz­zard co-founder Howard Marks, has a mo­bile app, “Fortress Fury,” that re­ceived 1.5 mil­lion down­loads in its first month. Now Xreal wants to grow the tower-con­struc­tion game and needs money to do it.

On Fri­day, Xreal plans to be­gin us­ing an online ser­vice cre­ated by Miller to gauge how many peo­ple want to com­mit to in­vest­ing at least $500 in the start-up. If there’s enough in­ter­est, Xreal will use new eq­uity crowd­fund­ing ser­vice StartEngine to col­lect money.

Maron said he wants to tap the nearly 8.7 mil­lion fans of his YouTube ac­count, Cap­tainS­parklez, and let them share in his suc­cess — or fail­ure.

“We’re thrilled to be rais­ing funds in a pro­gres­sive and per­sonal new way that bet­ter res­onates with my gen­er­a­tion,” Maron said.

Miller es­ti­mated that more than 95% of in­vestors could come from the “non­rich” de­mo­graphic.

The fundrais­ing will work sim­i­larly to Kick­starter and In­diegogo, web­sites where com­pa­nies or in­di­vid­u­als re­ceive small chunks of cash from dozens of peo­ple, who in turn re­ceive dis­counts, first-gen­er­a­tion prod­ucts or give­aways. About $16 bil­lion in cap­i­tal moved through re­wards crowd­fund­ing ser­vices in 2014.

In con­trast, on StartEngine and other eq­uity crowd­fund­ing plat­forms, sup­port­ers get stock.

Since the JOBS Act passed three years ago, sev­eral of those ser­vices have been able to fun­nel cash from wealthy in­vestors to start-ups, in­clud­ing more than $100 mil­lion to about 340 tech com­pa­nies in the U.S., ac­cord­ing to data from track­ing firm Crowd­netic.

The num­ber could grow rapidly now that any­one can in­vest. The rule change goes into ef­fect Fri­day, about three months af­ter the Se­cu­ri­ties and Ex­change Com­mis­sion com­pleted a lengthy process to de­fine the reg­u­la­tion.

Be­fore, sales of pri­vate stock had been lim­ited to peo­ple whose most re­cent two-year in­come ex­ceeded $200,000, hold a net worth above $1 mil­lion ex­clud­ing their home or con­trol more than $5 mil­lion in as­sets. Ev­ery­one else had been able to in­vest un­der only spe­cial con­di­tions, such as al­ready hav­ing an es­tab­lished re­la­tion­ship with an en­tre­pre­neur.

Those stan­dards were de­signed to pro­tect re­tail in­vestors from be­ing duped by some of the high­est-risk bets out there. But they also re­stricted ac­cess to the big­gest re­wards — like a $5,000 in­vest­ment in a ris­ing so­cial media com­pany be­com­ing worth $5 mil­lion when it goes public — to an elite group.

In the tech in­dus­try, the setup con­cen­trated sig­nif­i­cant power among ven­ture cap­i­tal­ists, a cadre of typ­i­cally older, white and male in­vestors. That left out mi­nori­ties, women and those with­out re­la­tion­ships in the VC world, Miller said.

Re­nee Far­ris, 30, is among the newly lib­er­ated in­di­vid­u­als ex­cited to in­vest. Far­ris, a Los An­ge­les writer, said she imag­ines in­vest­ing up to $5,000 a year in en­vi­ron­men­tally re­spon­si­ble start-ups.

“In­vest­ing in a com­pany that has no track record, that isn’t pulling in rev­enue — it’s risky,” she said. “But there’s a risk to make a lot of money too.”

Even though the bar­rier to en­try has now been low­ered for the public, fi­nan­cial ex­perts worry that the num­ber of com­pa­nies ready to en­dure the new rule’s re­quire­ments will turn out to be small.

But some start-up founders are con­sid­er­ing the op­por­tu­nity be­cause they want to spend less time fundrais­ing via tra­di­tional chan­nels and want ac­cess to any­one who will fork over money. Reach­ing out to the gen­eral pop­u­la­tion for cap­i­tal is also ap­peal­ing for start-ups that cater to a niche au­di­ence and have strug­gled to per­suade big ven­ture firms to give them a chance.

Take Urbn Havn, a San Fran­cisco start-up that rents out lux­ury homes for short stays and cor­po­rate get­aways. Sil­i­con Val­ley and Los An­ge­les in­vestors aren’t jump­ing at the chance to be in­volved, co-founders Jan Hoep­per and David Chou said.

“The in­vestors have been bit­ten by the big gamechang­ing start-ups,” Chou said, not­ing that his start-up will be smaller and slow­er­grow­ing.

Urbn Havn se­cured one ma­jor in­vestor, but needed more cash. By widen­ing the pool of po­ten­tial fun­ders to any­one with In­ter­net ac­cess, the duo think they can cob­ble to­gether $1 mil­lion from peo­ple who would then con­trol 10% of Urbn Havn.

“We want to find peo­ple who un­der­stand there’s a need for prod­ucts like this in the world and not just the things that go mass and in­fi­nite,” Chou said.

Urbn Havn plans to of­fer shares to the public through FlashFun­ders, an online eq­uity fund­ing plat­form, in part be­cause it saves star­tups as much as $50,000 by han­dling le­gal and fi­nance tasks for them. De­spite want­ing to turn mil­len­nial cus­tomers into in­vestors, Urbn Havn de­cided against tak­ing money from lower-in­come in­di­vid­u­als be­cause of the ad­di­tional costs.

The SEC and sev­eral states, in­clud­ing Cal­i­for­nia, are de­bat­ing fur­ther changes to ad­just rules that hin­der start-ups from ac­cept­ing any­one’s cash.

The con­cern among some law­mak­ers is that too much lee­way will lead to fraud, tar­get­ing groups such as the el­derly.

Miller is out to prove that isn’t the case, not­ing both that gam­bling mecca Las Ve­gas is open to all and that Kick­starter has seen few cases of fraud.

“We haven’t given up,” he said. “Entrepreneurship sec­tors will be sig­nif­i­cantly aided by the avail­abil­ity of crowd fi­nance.”

Carolyn Kaster As­so­ci­ated Press

PRES­I­DENT OBAMA signs the Jump­start Our Busi­ness Star­tups Act in April 2012. Be­cause of the JOBS Act, start-ups can now is­sue shares to any­one.

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