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‘Crowdfunding’ Rules Are Unlikely to Meet Deadline

By ROBB MANDELBAUM

When the Jobs Act became law in April, supporters proclaimed a new era for small businesses seeking to raise money.

The “game changer,” as President Obama put it in the Rose Garden as he signed the bill, was a provision to let small companies “crowdfund” — that is, sell stock and other securities over the Internet directly to the public. “For the first time,” the president said, “ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

But it now seems that dawn will break late on this new age of democratic investing. The Securities and Exchange Commission appears certain to miss its end-of-year deadline for issuing regulations to put the provision into effect. And with the departure of the S.E.C. chairwoman, Mary L. Schapiro, and three of her top deputies — including two who manage the offices writing the regulations — some in the nascent equity crowdfunding industry worry that it could be 2014 before their line of business becomes legal.

The delay has frustrated many crowdfunding backers. The 270 days that Congress gave the S.E.C. to write the rules “is not a suggested timeline; it is a Congressional mandate,” said Kim Wales, an organizer at Crowdfund Intermediary Regulatory Advocates, a lobbying group formed in April to represent the new industry, in an e-mailed statement. “The S.E.C. answers to Congress, not the other way around.”

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Originally published in the New York Times on December 27, 2012
http://www.nytimes.com/2012/12/27/business/smallbusiness/why-the-sec-is-likely-to-miss-its-deadline-to-write-crowdfunding-rules.html

A Crowdfunding for Equity Success Story in England: Righteous Salad Dressing

By Chelsea Dommert

As AnnMarie explained last week, equity-based crowdfunding has huge potential to help startup or small business owners raise capital from lots of supporters. Crowdfunding can also validate a business idea and simultaneously build a customer base. Creating a successful campaign, however, requires some savvy, and savvy comes from experience. For many, the first crowdfunding campaign has to succeed – small business owners can’t spend time running multiple semi-good campaigns just to gain experience. Luckily, it is possible to learn from other people’s experiences instead of relying on our own.

There are some really excellent case studies out there. I could throw a hundred at you, but we’re going to start with just one from England–Righteous– where crowdfunding for equity is already legal.  In the U.S., crowdfunding for equity is expected to be legal in 2013.

Righteous used a crowd investing campaign to raise £75,000 (about $121,000) for supermarket outreach.  The CEO, Gem Misa, recently did an interview with BBC radio(Gem’s interview starts at 9:13). The interview points out three crucial aspects of a successful crowd investing campaign:

 

1.    Gem started validating her idea before she started the campaign.

Gem already had some supporters before she started her crowd investing campaign. She had asked strangers whether they would buy a vegan, chemical-free, great-tasting salad dressing. She had already tried the product in a few stores. People had already tested the product, and supported the brand. Guess what? Those were the people who invested first in the company.

That surprised Gem. “I was thinking it was more of friends and family that were going to be participating, but I was so amazed that people have heard about the brand and wanted to be able to be part of it.”

 2.    Gem’s company idea was easy to explain and easy to understand.

Everybody gets the idea of an all-natural salad dressing. Crowdcube CEO Darren Westlake explains, “People invest in things that they can understand.” He says, “We’ve had a lot of success in consumer products that have been in supermarkets…people can understand those; they’re very simple.”

Take note: crowd investing isn’t for all companies. Westlake explains, “We’ve had a few kind of scientific, more complicated businesses on the site and people just don’t understand them; if you don’t understand them, you’re probably not going to back them because you can’t feel confident in your investment.”

3.    Gem had planned what she would do with the crowd’s investment. 

Righteous intended to launch a TV and radio ad campaign with the crowd’s invested capital. The comapany’s clear vision made it easy to take quick, cost-effective action after the crowdfunding campaign was over. The advertising campaign made listeners want to try the product and helped Righteous break into more supermarket chains.

There was never any question around the destiny of the crowdfunded money. It wasn’t just for administration or odd projects around the office. Gem had a plan, and Righteous executed on the plan once their crowd funded it.

 

In summary: Righteous had a simple, easy-to-understand idea. They tested that idea in the market before pursuing expansion, and their crowd investment campaign was only part of their larger strategy.

The Righteous example offers some great lessons for designing your own crowd investing campaign; soon, business owners in the United States will be able to seek crowd investment just like Righteous did. Any startup or small business owner can go start preparing their pitch right now at one of many companies including earlyshares.com. Also, anyone, regardless of income, can sign up to invest so that when crowdfunding for equity is legal in the U.S., they are ready to get in on the ground floor of innovative new businesses.

How America Works: Crowdfunding for Equity (VIDEO)

By AnnMarie McIlwain, Founder and CEO, www.careerfuel.net

Tom Szaky is a 30-year-old successful entrepreneur with a high growth, $15 million business. He, like many, believes that crowdfunding for equity—a new vehicle for raising capital, expected to be available in 2013—will make it substantially easier for small businesses to get off the ground and/or take their business to the next level. Hear Tom describe how this new avenue for fundraising could have helped him when he started out 10 years ago and how crowdfunding for equity may democratize the investment upside of early-stage companies. For anyone who doesn’t understand what crowdfunding for equity is and why they should care, Tom will put you “in the know”!

Help us tell the Securities and Exchange Commission to make it happen- click here to sign a petition  telling the SEC that we need them to finish the regulations on time (by the end of this year!) so that we can start raising money for our businesses and create jobs.

AnnMarie McIlwain, Founder and CEO of CareerFuel, is a Board member of CFIRA, a leading advocacy group working with the Securities and Exchange Commission, the Financial Industry Regulatory Industry Regulatory Authority (FINRA) and other affected governmental entities to help establish industry standards and best practices for equity based crowdfunding.

Video Production by Mayer Dubinsky Videography

Infographic: Crowdfunding for Equity

By AnnMarie McIlwain, Founder and CEO, www.careerfuel.net

According to the U.S. Bureau of Labor Statistics, 4.6 million jobs were created in 2000 by establishments less than 1 year old. In 2011, this number declined to 2.5 million­—a loss of 2.1 million jobs.

The infographic below shows how crowdfunding-for-equity, a new fundraising tool created by the JOBS Act of April, 2012, has the potential to fill that shortfall in job creation. However, crowdfunding-for-equity can’t happen until the Securities and Exchange Commission (SEC) writes the regulations. The SEC missed their first deadline in meeting this enormous challenge in July.

Please join us in telling the SEC how important it is to meet the end-of-year deadline for this new set of regulatory laws. Click here and sign the petition.

Crowdfunding For Equity Infographic

Will the New Crowdfunding Law Make a Difference to Your Business?

By AnnMarie McIlwain, Founder and CEO, www.careerfuel.net

If you are a small business owner or an aspiring entrepreneur you might be wondering what you need to know about the new crowdfunding law. If so, keep reading!

*The JOBS Act was signed into law on April 5, 2012. One of the Act’s provisions will allow startups to raise capital using crowdfunding. The basic idea is that entrepreneurs will be able to offer equity in exchange for investments in their startup. At present, startups can raise an unlimited amount of money using crowdfunding, but they cannot offer equity. Today’s incentives range from free product, to tee-shirts and karma.

*The Securities and Exchange Commission (SEC) has until December 31, 2012 to create regulations for how crowdfunding will be executed. Fall 2012 is the earliest time this might be completed, but realistically it is expected to take until year’s end.

*Money can only be raised through brokers or on Internet “funding portals” (such asKickstarter and HelpersUnite) registered with the government. Entrepreneurs cannot go directly to consumers to crowdfund for equity.

*Monies raised are dispersed  if they achieve their stated goal.  So, if a company’s fundraising goal is $500,000 in 30 days and they only raise $490,000 at the end of 30 days, then the company does not receive any funds and the crowdfunded investments are returned to the individual investors.

*Entrepreneurs can raise $1M every 12 months until they reach $10M in total assets.

*The entrepreneur can decide how much equity is being offered in exchange for the total investment being raised.

*The SEC will need to rule on whether any or all crowdfunding investors will count toward the 2,000-investor limit that triggers the requirement for a company to register its common stock and become a publicly reporting company. The JOBS Act, as written, does not limit the number of crowdfunding investors. If the SEC decides to include crowdfunded investors in the 2,000 investor limit, entrepreneurs will then need to limit the number of small investors (as in only 20 people can invest $200, 30 at $400, etc.). If this were the case, crowdfunding would be more like group funding.

*Any person who owns 20% or more of the company stock will be required to go through a background check, the details of which will be made public on the crowdfunding site (e.g., credit history, tax liens, etc.).

*Any money raised through family and friends prior to the first crowdfunding round will need to be disclosed.

*Investors will be limited to a total annual investment based on their net worth. For those with annual income of less than $100,000 or equivalent net worth, investments are limited to the greater of $2,000 or 5% of their income/net worth. For those whose annual income/net worth exceeds $100,000, they can invest 10% or up to $100,000.

*Regulations will require platforms to use a pop-up box, where investors will read disclaimers and take a quiz ensuring that they understand the high risk associated with such an investment.

*All social media forums will be connected to the crowdfunding platforms and openly shared. Questions raised by potential investors will be publicly available to read, as will the answers to these questions. This includes inquiries pertaining to the business model, financial projections, use of investment monies, etc.

*Entrepreneurs will be limited to solicitation via existing social media contacts. Email/Facebook/Twitter etc. contacts will be uploaded to the government-approved crowdfunding site that the entrepreneur has selected. Entrepreneurs will then solicit from those people via that specific site. Outbound marketing via email or public relations to previously unknown parties will not be allowed.

*Investments will be tracked by affinity circles (i.e., 1st degree is someone from the entrepreneur’s LinkedIn, Facebook, Twitter, etc. connections; a 2nd degree affinity is someone from a 1st degree connection and 3rd degree affinity is someone completely unknown to the entrepreneur but who came to the crowdfunding site).

*It is expected that the vast majority of investors will come from 1st and 2nd degree affinity circles.

Upon reviewing the current JOBS Act provision for crowdfunding, the key conclusion I draw is that it is not going to be as useful to small business America as I had hoped. Unless you have a large social network, savvy communication skills, and a well-conceived business plan, I am not sure that you would feel comfortable navigating these regulatory waters.  And would it be worth the time for a small dollar amount (say below $100,000)?

My guess is that existing businesses with a following are probably the most likely to succeed under the new crowdfunding law.

Maybe this is the way it should be?  I’m not sure, but time will certainly tell. And nothing will really get going until 2013.

A final note: Sherwood Neiss of StartUpExemption.com provided more insight on this subject than any other person I heard speak or whose articles I have read. He was one of the few laypeople “at the table” with Congress and The White House advocating for this law and advising on the details. I am very grateful to Sherwood for his time and input.

Micro Investing to Fuel America

By AnnMarie McIlwain, Founder and CEO, www.careerfuel.net

We don’t normally do opinion pieces at CareerFuel, but in light of the legislation before Congress known as the JOBS Act and its potential impact to small business creation, we offer the following perspective.

We have 3.1 million jobs available today and 24 million people unemployed or underemployed. In the absence of a massive government job-creation program, this disparity will require a wave of entrepreneurial activity to create jobs. The single biggest challenge facing entrepreneurs, however, is capital. This is a problem driven in part by market inefficiencies: a highly fragmented landscape; extensive regulations; and a system that depends heavily on one’s network (ideally of successful and wealthy individuals) to navigate.  With the scale and efficiencies of the web, crowd funding for equity is an idea whose time has come.

Individuals can gamble or play the lottery with no restrictions. How is it that a limited purchase of stock in a startup is any different in risk? While I applaud our political leaders for working together to help small businesses with the JOBS Act, the current legislation before the Senate is misguided. If it follows The House Bill, it will limit investments to the lesser of $10,000 or 10% of net worth.  Not only does this allow for too much risk for all but the wealthy investor as fraud is inevitable, but I believe it misses the spirit of what crowd funding should accomplish.

Crowd funding, at its heart, should enable the average American to participate in a sector of our economy that has long been the purview of the rich. Currently, Americans do not have a chance to invest in companies such as Apple or Amazon until its value has been largely vetted and its public market price reflects it. Limiting such investment opportunities has been a contributing factor to the 1% wealth bifurcation of our society.

Every American should have the opportunity to purchase a minimal amount of ownership, in order to be there on the ground floor and enjoy the possible rewards. Kleiner Perkins and Sequoia Capital purchased an estimated 44M shares of Google in 1999 at 57 cents per share. Each share grew to $85 in the 2004 IPO offering and would be worth $633 today, if unsold. Net, the majority of the gains (149X the purchase price) were pre-IPO, while the IPO investors gained 6.5X on their money.  Assuming the same terms that grew Kleiner Perkins and Sequoia’s original investment of $25M to $28B today, a crowd funding investment of $250 would be worth $278,736 today.

An offering limited to small denominations does not require extensive knowledge or disclosures and it should not come with any rights to influence the company unless organized by a collective group controlling (let’s say) 20% or more of the crowd funded stock.  For in the absence of limiting involvement, the already stretched small business owner would not be able to build the business. This does not serve anyone’s needs in the end.

My company, CareerFuel, would love to offer Americans a chance to “Own a Piece of How America Works”. Our product—curated and original content designed to provide the “cliff notes” on how to find a job or start a business—is inherently designed to solve their economic needs. If the average American is good enough to make my business a success, as my customer, why shouldn’t they be entitled to participate in the financial upside as an investor?

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