Tag: crowdfunding

Texas Proposes Equity-based Crowdfunding Rules

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.


Tips for Startups on Raising Old Money and Crowdfunding

Photo of Stephanie Chandler, partner of Jackson-Walker, courtesy of the law firm.

Photo of Stephanie Chandler, partner of Jackson-Walker, courtesy of the law firm.

Old real estate and oil money in town invested in San Antonio’s Rackspace early on, said Stephanie Chandler, partner with Jackson-Walker.

It was one of the first cases of old San Antonio money backing a startup technology venture here, she said.

Now with Geekdom, a technology incubator and accelerator in downtown San Antonio, the goal is to get even more local investment into startups, Chandler said.

“Over the last ten years there’s a much more significant uptick in what families are doing,” in investing in startup deals, she said. “Five years ago, we didn’t have the Rackspace founders looking at deals.”

Five years ago, the Center for Innovation and Technology Entrepreneurship at the University of Texas at San Antonio didn’t have its bootcamps in which it introduced mentors to support young startups, she said.

Historically, a lot of the family offices in San Antonio didn’t want to look at startup investments, Chandler said. But that’s changed.

“There is a lot of buzz going on at the San Antonio country club about what’s going on in town and trends,” she said.

Chandler spoke last week at Jackson Walker’s law offices in downtown San Antonio on “Raising Capital from New Money and Old Money: Crowdfunding and Family Offices in 2014.”

Mike Laussade of Jackson-Walker also gave a presentation to about 50 entrepreneurs in attendance.

“Most startups don’t attract money from lenders,” she said.

Angel investors generally put anywhere from $25,000 to $250,000 into a deal, Chandler said.

“Clearly they are motivated by getting a return, but they are also looking for something else,” she said.

For example, a lot of the successful entrepreneurs and executives with Rackspace are now investing in early-stage tech startups to give back to the community, Chandler said.

When startups raise money, it’s important that they adhere to federal regulations.

“Every single stock offering is required to be registered with the SEC,” she said.
That requires startups to provide audited financial statements and other expenses. But if you’re not doing a public offerings, there are exemptions to these rules.

“If a deal is truly private, you don’t have to register it,” she said.

The Securities and Exchange Commission’s Rule 506 provides an exemption to companies that allows them to raise an unlimited amount of money from accredited investors, Chandler said.

An accredited investor is someone who has net assets of more than $1 million not counting their house and income of $200,000 per year, Laussade said.

The Jobs Act allows for crowdfunding that allows companies to raise small amounts of money from large numbers of non-accredited investors, but it is not yet effective, Laussade said. The rules are still being worked out and might be adopted later this year, he said.

As of Sept. 23, the SEC adopted a New Rule 506( c ) that permits companies to solicit or advertise offerings as long as all the purchasers of the securities are accredited investors.

When dealing with old money, especially from the oil industry, in San Antonio some investors will not do a deal if it involves a 506-c solicitation which requires disclosure of investors, Chandler said.

“They are choices all along the path,” she said.

Once you go 506 ( c ), you can’t turn back, Laussade said.

Equity-based crowdfunding can only be done on a registered crowdfunding portal. And companies can only raise up to $1 million a year, Laussade said.

Securities law does not apply to Kickstarter and IndieGoGo because they are perk-based crowdfunding. The people donating money on those sites to projects are not investing in the company or getting any equity in exchange for their pledges.

To do equity-based crowdfunding from non-accredited investors, companies have to file a form C and provide audited financial statements. Those can cost $50,000, Chandler said. Companies also have to provide full disclosures on what they are doing.

“If you want to go stealth on your product, how are you going to do that?” Chandler said.

Annual reports are required. These are all things that are not required with a private offering, Laussade said.

“It’s going to be an onerous process,” he said. “And the rules aren’t yet final.”
The summer would be the absolute earliest the new equity-based crowdfunding rules will be effective, Laussade said.

SEC Releases Rules for Equity-based Crowdfunding

Photo licensed from Getty Images

Photo licensed from Getty Images

Early next year, startups may be able to raise money from the general public to finance their ventures.
The Securities and Exchange Commission on Wednesday released its long-awaited proposed rules governing the practice of equity-based crowdfunding that allows startups to sell securities directly to the public.
Legislation from the JOBS Act, signed into law by President Obama in January of 2012, directed the SEC to propose the rules by last October. But that date passed without any action. So nearly a year later, the SEC has published its proposed rules, which now await a 90 day comment period from the public before they become adopted.
For years, artists, game developers, filmmakers, authors, entrepreneurs and others have been using Kickstarter, Rockethub, IndieGoGo and other crowdfund raising platforms to support their projects.
The difference is that those platforms allow for perk-based crowdfunding. People give money to the various projects in exchange for a good or service or some other kind of perk. They do not take an ownership stake in the company.
Online sites like Angellist.com already allow companies to raise money from accredited investors or high networth individuals.
But under the JOBS Act, a section called “Title III” allows startups and small businesses to offer and sell securities on equity-based crowdfunding portals to anyone. And the SEC is tasked with regulating the practice.
The SEC has delayed releasing its rules to make sure that they can protect the interest of investors in these news opportunities.
“There is a great deal of excitement in the marketplace about the crowdfunding exemption, and I’m pleased that we’re in a position to seek public comment on a proposal to permit crowdfunding,” SEC Chair Mary Jo White said in a news statement. “We want this market to thrive in a safe manner for investors.”
The legislation has also created a “new entity – a funding portal – to allow Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.”
The proposed rules allow a company to raise a maximum of $1 million through crowdfunding in 12 months from investors who can spend $2,000 or up to 5 percent of their annual income or net worth. “During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding,” according to the SEC.
The following are not allowed to use equity-based crowdfunding: non-U.S. companies, companies that already report to the SEC, “certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.”
And any securities bought through a crowdfunding portal cannot be resold for a year.
Businesses looking to crowdfund would be required to file information with the SEC and provide it to potential investors. The companies would be required to disclose information about officers and director and others that own 20 percent or more of a company.
They are also required to provide a description of the company’s business and what they plan to spend the money on. The price for the securities being offered and the deadline to meet its goals and whether it will accept investments in excess of the target offering amount.
The companies also have to provide financial statements and other information on the financial condition of the company along with tax returns and an audit by a public accountant or auditor. Companies would also be required to amend the documents to reflect any changes in its business.
“Companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.”
The proposed rules also cover the crowdfunding platforms, the new entity set up online to sell the securities to the public. These portals would be required to provide investors with educational materials and take measures to reduce fraud.
The portals cannot offer investment advice or make recommendations. They cannot solicit “purchases, sales or offers to buy securities offered or displayed on its website.”

Greenhouse Founders Featured on A Slice of Silicon Hills News

58cd9642-7179-4c86-a0e6-828d61765b0a_244-1Finding Funding for your startup is hard, but Greenhouse is trying to make it easier.
The company is one of several firms taking advantage of the JOBS act of 2012, which relaxes regulations for equity investing and allows individuals to own stock in new startups without being SEC accredited. This means that you, or a friend of yours, can own equity in fledgling startups – as long as you go through a web portal that handles the legal issues.
This is exactly the service that Greenhouse provides. Founders R.C. Rondero de Mosier and Nathan Roach are based in Austin and San Antonio respectively, and hope to create a crowdfunding community in the south Texas area that benefits startups and investors as well as the local economies. With equity crowdfunding, the Greenhouse users will actually own part of the local startups they invest in, creating an incentive to stick with and promote such startups in the future.
“This creates a larger community because you turn your purchasers into advocates, and people are going to be ideally more long term engaged with you,” says Rondero de Mosier.
The JOBS act rules will go into effect as soon as the SEC releases regulations for those rules. Under old rules, only SEC accredited investors could purchase equity in private startup companies – or companies that had not already made an initial public stock offering. Such investors had to be either worth around a million dollars or prove that they made more than $200K annually for several years – a rule which Rondero de Mosier says excluded around 94 percent of Americans from investing in small businesses without public stocks. Once the new rules pass, companies like Greenhouse will open the door for those people by providing a web portal for such investment.
According to Forbes.com, the new rules will allow individuals making less than $100K – most of us – to invest five percent of their annual income in equity crowdfunding. Individuals making more than $100K may invest 10 percent.
Greenhouse is currently in beta, and plans to launch once the SEC rules are fully implemented. Users can sign up for the beta at FundGreenhouse.com.

The Wisdom of Crowdfunding

Founder Silicon Hills News
IMG_0166Crowdfunding will lead to an explosion in entrepreneurship, innovation and job creation in the U.S., according to its advocates.
“We’ll go from 60,000 angel investors to six million angel investors over the next decade,” said Chris Camillo, an angel investor and filmmaker producing a documentary “Crowd of Angels.”
“This will change the way investment is done in the U.S.,” said Trey Bowles, chair of Startup Texas, an affiliate of Startup America.
Lack of access to capital is the number one inhibitor to starting a business today, said Jason Best, principal of Crowdfund Capital Advisors and co-founder of the Crowdfunding Professional Association.
They all spoke at the first-ever Crowdfund Texas Conference in Austin on Tuesday, along with dozens of others involved in the emerging new industry, known as crowdfunding. Most of the industry pioneers attended and quite a few of them were featured in a recent New York Times article “The Crowdfunding Crowd Gets Anxious.” The article detailed how Candace Klein, founder of SoMoLend, and others looked for alternative revenue sources while waiting for U.S. Securities and Exchange Commission approval to go ahead with their equity-based crowdfunding portals that take investments from regular people and not wealthy accredited investors.
IMG_0163At the Crowdfund Texas Conference, Klein participated on two panels and had a table with information on her company in the hallway. SoMoLend, based in Cincinnati, partners with banks and offers low-interest loans to small businesses nationwide.
With equity-based crowdfunding, companies hope to tap into money that isn’t available to them right now.
“If Americans shifted just one percent of the $30 trillion they hold in long-term investments to small businesses, it would amount to more than 10 times the venture capital invested in all of 2011,” according to the Crowdfunding Professional Association.
Currently, crowdfunding allows individuals to invest in new ideas and projects. For the past five years, companies like Kickstarter, RocketHub and IndieGoGo, have allowed individuals to donate money in exchange for perks like a new pair of tennis shoes or a watch. Since the donors are not actually investing in the company, the practice is legal.
In the past few years, individuals have poured millions into new ideas through crowdfunding, which saw its investment rise 92 percent last year, according to Startups.co. And Kickstarter, founded in 1999, reported more than 2.2 million people pledged a total of $319.7 million to successfully fund 18,109 projects in 2012. Many of the projects supported the arts. Kickstarter doesn’t allow people to raise money for charity, a cause or “fund my life” ventures.
The projects-based funding on Kickstarter doesn’t work for some startup companies like a biotechnology company looking to create a new medical device. Best said.
That’s where startups hope to tap into equity-based Crowdfunding, which Congress approved as part of the Jumpstart Our Business Startups, known as the JOBS Act. That law allows companies to raise up to $1 million a year from small investors. It has already created new businesses like EarlyShares in Miami with 20 employees. But EarlyShares hasn’t been able to finance any companies yet through its online portal. The entire industry must wait for regulations from the U.S. Securities and Exchange Commission before they can begin to match companies with small investors. The SEC already missed its deadline for submitting the new rules and no one knows for certain when they might be issued.
But the demand for equity-based crowdfunding is there, said Hall T. Martin, director of Texas Entrepreneurs Networks.
“The angel groups just can’t keep up with the deal flow right now,” Martin said.
Texas Entrepreneurs Networks plans to launch an equity-based crowdfunding portal to augment the deals its already doing with accredited angel investors, Martin said.
“A huge amount of money is sitting on the sidelines right now looking for good investments,” Martin said. “This will substantially increase deal flow.”
Small businesses struggle to get loans especially in the wake of the financial crisis, said Heather Schwarz-Lopes, CEO of EarlyShares.
Small businesses and private companies get less than one percent of investment capital.
“There’s a huge opportunity out there,” she said.
Right now, EarlyShares focuses on investor education. Already, 60,000 users have registered on its site, including 2,000 companies. It’s doing traditional broker-dealer investments with accredited investors until it gets the go ahead to make equity-based investments with non-accredited investors. It’s going to make money by taking a 5 percent to 10 percent fee on each transaction, Schwarz-Lopes said.
“Crowdfunding is going to revolutionize financing for companies,” she said.
But some speculate the SEC has not yet released its rules because of worries about fraud. The fear is that investors will lose money. And some will, said Doug Ellenoff, partner at Ellenoff Grossman & Schole, a New York-based law firm. But that’s the inherent risk involved in financing startup companies, he said.
But the hope is that some of the investments will enable entrepreneurs to create the next Facebook or Microsoft, Bowles said.
IMG_0172So far, few cases of fraud have been reported. In a review of more than $250 million worth of crowdfunding transactions, Jonathan Sandlund, founder of TheCrowdCafé, didn’t find any cases of fraud. That’s not to say that failures don’t occur, he said. But a startup failure is not the same as fraud, he said.
Equity-based crowdfunding is already legal in the United Kingdom and Australia and it is working really well, said Best, who has travelled all over the world to learn about and promote crowdfunding.
Crowdcube in the United Kingdom launched in 2010 and finances, on average, $88,000 per company, said Sandlund. But only seven percent of the companies seeking investment are successful, he said. That shows that the crowd is pretty good at vetting the companies seeking funds and investing in only the best ideas and teams, he said.
“It’s not a financial trend, it’s a cultural shift,” Sandlund said.
Crowdfunding appeals to the millennial generation seeking locally based goods and services and something unique and cool, Sandlund said. They like to invest in startups and new ideas, he said. They also like to seek funding from a community of supporters, he said.
CircleUp, launched in mid-2012, and has already invested $7.5 million in eight deals into privately held consumer and retail companies. CircleUp, based in San Francisco, deals with accredited investors only and that’s why it’s able to do deals. It is the nation’s largest equity-based crowdfunding site.
Best also believes equity-based crowdfunding will provide investment stimulus to a variety of entrepreneurs in all areas of the country.
Currently, angel and venture capital investment is concentrated in a handful of cities: Boston, Austin, San Francisco and Silicon Valley, he said. Entrepreneurs often move to those areas to be close to sources of financing and support, he said. Imagine if an entrepreneur in Louisiana had access to investment capital, he said. They wouldn’t have to move and they could begin to expand their company and impact the local economy favorably, he said.
Crowdfunding can also take the bias out of investments, Best said. Many investors are white men who invest in ideas they feel comfortable with and people like them, he said. But crowdfunding allows people of all races and gender to tap into financing a variety of ideas, he said.
So a 40-year-old Asian woman in Topeka, Kansas who wants to launch a healthy snack food company for toddlers has as great a chance of getting financed as a white male 20-something in Austin with a software as a service company.
Already, a barista in Portland, Oregon had success with creating a new coffee filter. Best invested in the idea by buying his product on Kickstarter.
Keith Gehrke, owner of Able Brewing, raised $155,162, exceeding his $5,000 goal on Kickstarter to create a new coffee filter and ceramic brewer. He was four months late in delivering his product to Best, but he has constantly communicated with his donors and that’s Ok with Best. He’s been able to share in Gehrke’s entrepreneurial journey.
With crowdfunding, the secret sauce is in the person’s social network.
“You’re investing in an idea,” Best said. “You’re investing in a person.”
And crowdfunding allows investors to vet a person because no one knows them better than the people in their social networks, Best said.

Crowdfunding Set to Transform How Startups Raise Money

imgres-1Congress passed a law last year that allows startup companies to raise money directly from investors through online crowdfunding portals.
The only problem is the U.S. Securities and Exchange Commission has not yet released rules to tell the crowdfunding industry how to do that. It’s part of the nitty-gritty details of the Jumpstart Our Business Startups, known as JOBS Act, that are still being hashed out even after President Obama signed the bill into law last April.
Today at the Omni Hotel in downtown Austin, a group of about 250 people are meeting for the first ever Crowdfund Texas Conference to learn about this emerging industry.
“We did this in hopes of really bringing together the Texas startup community to spark a crowdfunding movement in Texas,” said Chris Camillo, an angel investor and filmmaker.
The day-long event features a variety of speakers talking about everything from crowdfunding regulations to how to succeed at crowdfunding. Startup Texas, a member of the Startup America Partnership and the Crowdfunding Professional Association are sponsoring the conference.
At the event, Camillo, who is producing “Crowd of Angels” is conducting interviews for the documentary which is set to debut at the Crowdfunding Professional Association convention in October.
During a morning panel on “Crowdfunding Investing Insiders: State of the Industry,” Scott Purcell, founder of crowdfunding platform Artic Island, said that crowdfunding was the “perfect storm” to change the world.
“It will change everything, and it’s going to be a lot of fun,” Purcell said.
D.J. Paul, formerly cofounder and chief strategy officer of Crowdfunder, agreed.
“It has the potential to be incredibly transformative,” Paul said.
The panelists estimated that the SEC might take from six months to nine months to release rules for crowdfunding that will let the practice begin in the United States.
“It’s really about politics now and I think there’s some movement,” said Maurice Lopes, cofounder and CEO of EarlyShares, a crowdfunding portal based in Miami.
The SEC has a lot of other regulatory issues to deal with, Paul said.
“An entire industry is being created by this legislation,” he said. “It’s a new asset class. No additional monies were allocated by Congress to create this new asset class. It’s appropriate to be frustrated. It’s also appropriate to understand the other issues the SEC is dealing with right now.”
No one knows how many new crowdfunding portals will be created.
Lopes with Early Shares estimates there will be hundreds of different service providers but few funding portals.
“What most people don’t’ realize is this is not a Web business. This is a financial industry,” Lopes said. “This is a heavily regulated business.”
Early Shares has spent $500,000 in legal fees and in house counsel for compliance issues in the last year, Lopes said.
“I don’t think there are hundreds of players in this space with that kind of money,” he said.
There are going to be more than 10 but there aren’t going to be as many as people think, said Purcell.
“It’s pretty few and far between to find people that understand both worlds and can put this together,” Purcell said.
Purcell estimated that there might be as many as 50 to 100 crowdfunding portals but that they’ll go through a period of rapid consolidation and get down to two or three national players in a few years.
An estimated 1,500 to 2,000 jobs have already been created by the new legislation, Lopes said. His company employs 20 people.
“It’s already working for what it was intended,” Lopes said.

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