Crowd­fund in­vest­ing proves no bo­nanza

The Oklahoman (Sunday) - - BUSINESS - BY JOYCE M. ROSEN­BERG AP Busi­ness Writer

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 $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 $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 fa­vorite 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.

Lim­it­ing fac­tors

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 $1 mil­lion, and in­di­vid­u­als with in­come or net worth un­der $100,000 can in­vest a to­tal of $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 $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 $1 mil­lion, are re­quired to turn away in­vestors who try to sign up af­ter that to­tal is met.

When Ron Wil­son's ath­letic wear com­pany, Hylete, aimed to raise $1 mil­lion last year, it got $1.3 mil­lion in of­fers for its shares.

"We couldn't take the other $300,000. Our cus­tomers were up­set," says Wil­son, whose com­pany is based in Solana Beach, Cal­i­for­nia.

An­other is­sue is an SEC rule that re­quires com­pa­nies to reg­is­ter their se­cu­ri­ties with the gov­ern­ment — es­sen­tially go­ing public — if they have $25 mil­lion or more in as­sets and more than 2,000 in­vestors or over 500 who are not "ac­cred­ited" to spe­cific stan­dards of ex­per­tise.

That rule, an ex­pen­sive propo­si­tion, is a bar­rier to com­pa­nies' growth, Tom­marello says. Bourg­erie is also con­cerned about the rule, though it does give com­pa­nies that reach the limit two years to get their se­cu­ri­ties reg­is­tered.

"We're go­ing to hit it at some point," he says. "Luck­ily it's not the like the day you hit it you have to com­ply, but's that's some­thing we have to be aware of."

Not for ev­ery­one

Dar­ian Ibrahim, a law pro­fes­sor with ex­per­tise in se­cu­ri­ties, isn't con­cerned about the draw­backs and rel­a­tively slow start crowd­fund­ing in­vest­ing has had. He thinks it's been suc­cess­ful for some com­pa­nies that are just too young to get pro­fes­sional in­vestor money. And he's also not wor­ried that the gen­eral public hasn't latched on to the con­cept.

"I don't buy the premise that this is for ev­ery­one," says Ibrahim, who teaches at the law school of the Col­lege of Wil­liam & Mary. He noted that most peo­ple, in­clud­ing pro­fes­sional in­vestors, aren't very good at pick­ing win­ners among newer com­pa­nies.

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, which ended Mon­day, at­tracted 81 in­vestors and $51,885, nearly half its $107,000 goal; Shelby was sat­is­fied with the amount raised.

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.

The crowd­fund­ing in­dus­try is hop­ing that Congress and the SEC change some of the rules. Tom­marello ex­pects the SEC will re­view its reg­u­la­tions af­ter sev­eral years of as­sess­ing their im­pact. And bills have been pro­posed in Congress to mod­ify some of the re­quire­ments and al­low com­pa­nies to raise more than $1 mil­lion, but the leg­is­la­tion hasn't had sup­port in both houses and doesn't look to be­come law any­time soon.

"It's very chal­leng­ing to get changes in Wash­ing­ton right now," Feit says.


Justin Shelby, CEO of Ar­ti­choke, a com­pany that sells an app to help busi­ness own­ers man­age their com­pa­nies, poses for a pho­to­graph in Bal­ti­more.

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