Texas Proposes Equity-based Crowdfunding Rules

By LAURA LOREK
Founder of Silicon Hills News

Crowdfunding Photo licensed from iStockphotos.com

Crowdfunding Photo licensed from iStockphotos.com

In Austin, one of the big issues facing startups, particularly in the technology industry, is lack of access to capital.

Last year, Austin companies received $626 million in venture capital, or 49 percent of the venture capital dollars for Texas, said Michele Skelding, senior vice president of global technology strategies at the Greater Austin Chamber of Commerce.

“That still represents just 2 percent of the nation’s venture capital,” Skelding said. “So we’re hungry for capital.”

Equity-based crowdfunding may help meet that need.

Skelding hosted about 50 people involved in Austin’s startup industry at a roundtable lunch discussion Wednesday focused on newly proposed Texas crowdfunding rules.

Crowdfunding is one of the hottest trends now for entrepreneurs, said Joy Schoffler, owner of Leverage PR and a board member of the Crowdfund Intermediary Regulatory Advocates.

Soon entrepreneurs will be able to use equity-based crowdfunding to tap into investments from the general public. The U.S. Jobs Act, signed into law by President Obama in 2012, is making that possible. It will begin once the U.S. Securities and Exchange Commission issues its final rules governing the practice. So far, the SEC has missed several deadlines to enact the rules.

Meanwhile, Texas and eight other states have proposed regulations that would allow for intrastate crowdfunding.

“The term crowdfunding can really cause some confusion,” Schoffler said.

Several types of crowdfunding exist including reward-based crowdfunding on platforms like Kickstarter and IndieGoGo. And individuals can crowdfund for donations on platforms like GoFundMe.com. Some crowdfunding sites like Kiva.org allow people to provide loans to small businesses worldwide. And sites like AngelList.com allow companies to raise funds from accredited investors or individuals who make more than $200,000 annually and have a net worth in excess of $1 million, not including their house.

Crowdfunding conceptBut the ability to raise money from the general public through equity-based crowdfunding is not yet possible in Texas. But in other states like Georgia it is legal. Georgia already passed its own rules allowing for equity-based crowdfunding.

The SEC has 175 pages of rules being proposed to govern equity-based crowdfunding, said John Morgan with the Texas State Securities Board. Texas’ rules would not supersede the SEC rules, but if Texas passes its own crowdfunding rules, the state would allow equity-based crowdfunding before the federal government.

In April, Texas proposed its own equity-based crowdfunding rules. The Texas State House Committee on Investments and Financial Services will hold a hearing on May 21st to discuss the proposed regulations.

“The great thing about the rulemaking process is it’s flexible,” Morgan said. “There’s time to tweak these rules to get the exact right product we want.’’

The proposed Texas regulations let a company raise a maximum of $1 million every 12 months. An accredited investor can invest any amount. But a non-accredited investor can only invest $5,000. They can only invest through a Texas-owned website, known as a crowdfunding portal, which holds the funds in a bank account until the company meets its funding goals.

And all investors must prove they are Texas residents by providing a valid driver’s license or voter registration card. The regulations also require companies looking to raise money to post a detailed business plan, financial statements and other documents including a list of risk factors.

During the roundtable discussion, Ben Dyer, a serial entrepreneur and entrepreneur in residence at the University of Texas, asked about the ability to raise funds from investors in other states.

With the proposed Texas equity crowdfunding rules, all of the investors in a company must reside in Texas, Morgan said.

Shari Wynne, founder of Incubation Station, a consumer products accelerator, expressed concerns about the filing of a business plan and freezing a business outlook for a certain time since so many startups constantly pivot and change.

“There’s any number of things that are shifting with these companies,” she said

Paul Trowe of Replay Games expressed concern about the $5,000 limit per un-accredited investor. He said his company received $650,000 in 30 days on Kickstarter in 2012 and multiple donors gave more than $10,000 each.

“My questions is why would I want to do equity based crowdfunding with such strict regulations when I can go onto Kickstarter or IndieGoGo or any of the other platforms and not have such restrictions?”

Jason Seats of Techstars said Kickstarter and IndieGoGo work well for certain types of businesses focused on consumer products. It’s more difficult for companies working on enterprise sales tools to raise money from rewards-based crowdfunding, he said.

The legislation isn’t just aimed at tech companies, said Nathan Roach, an attorney with the RAM Law Firm. It’s designed to help all small and medium sized businesses statewide that need access to capital to expand, he said.

The crowdfunding portals help standardize the process of raising money from investors, Roach said.

Investors need to be able to trust the information coming to them, Roach said. The crowdfunding portals provide an entrepreneur with the necessary tools to raise money in compliance with the securities regulations, he said.

The portals also have to vet investors to make sure they are qualified as residents under the Texas rules.

Rick Timmins, chairman of the Central Texas Angel Network, said his members would not invest in equity-based crowdfunding ventures because of the regulations and disclosure requirements.

He said he sees a bifurcation of offerings when equity-based crowdfunding is enacted. Companies will either go down the path of traditional fundraising from accredited investors or they will choose to do equity-based crowdfundng from non-accredited investors, Timmins said.

“I don’t see it being co-mingled at all,” Timmins said.

CTAN is one of the most active angel networks in the country. The organization’s members invested $9.7 million in 33 companies last year.

Crowdfunding is one more tool in the arsenal of tools that are being provided to small and medium sized business throughout Texas, said Amir Mirabi, director of the governor’s office for small business economic development.

Crowdfunding provides more ways for the entrepreneurs who are building things to get close to their customers, said Gordon Walton with Gaming SIG in Austin. Kickstarter has been the most successful platform for game companies. They make up the largest category on Kickstarter, followed by film and TV, Walton said.

But equity based crowdfunding for the gaming industry is going to be a challenge, Walton said. The regulations need to be simple and friction free, he said.

“We would love to have our consumers become investors if they can overcome the challenges,” Walton said. “But the hurdles are high.”

A conference on crowdfunding is being held later this month in Austin. The CFGE Crowdfund Real Estate Summit and Entrepreneur Summit will be held May 29th and 30th at the Hilton Austin.

unnamed

Comments

  1. Great article, I had not seen this covered anywhere else. Way to go Texas!

  2. Lucas Martin says:

    The “Keep Austin Funded” program provides coaching and free consultation on reward-based crawdfunding platforms. http://www.bcloftexas.org/services/crowdfunding

  3. Here is a free user’s guide to investing in equity crowdfunding in Texas.

  4. Free User’s guide for investing in equity crowdfunding Texas
    https://hometownshares.com/go/investorsequitycrowdfunding/

Speak Your Mind

*