Crowdfunding 2.0: Even You Can Invest in the Next High-Growth Startup

Crowdfunding—an online method of soliciting money from the general public for a business, project, or cause—is about to go through a seismic shift. And it could mean insane profits for some investors—profits that were previously unattainable due to government regulations.

We are talking about the potential for the kind of jackpot enjoyed by early investors in high-growth startups like YouTube and Facebook. We’ve all heard stories about the lucky janitors who cashed out on equity after an IPO or acquisition and bought million-dollar homes and a porsche, or two, or three.

For the fact that millions of crowdfunding investors have been shut out of this opportunity until now, one does not have to look back very far for a lesson in extreme disappointment.

Virtual reality technology company Oculus VR, Inc., which manufactures the hotly anticipated Oculus Rift headset, raised $2.4 million on the popular crowdfunding site Kickstarter, largely from the gaming and developer community it serves.

When Oculus VR was acquired by Facebook for $2 billion, its more than 9,000 crowdfunding supporters who helped launch the company got nothing.

Source: Crowdfunding 2.0: Even You Can Invest in the Next High-Growth Startup

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Crowdfunding Cannabis: Marijuana Start-ups Get the Capital They Need – CannabisFN

The cannabis industry may be booming in terms of revenue, but marijuana start-ups looking to raise capital face a number of hurdles. The traditional banking sector has shunned the industry, despite the Obama Administration’s attempts to open up access. In 2013, Attorney General Eric Holder created a “reduced prosecution safe harbor” for commercial banks, but that’s a far cry from legalization. Banking executives were quick to point out that prosecutorial discretion only works as long as the administration in power supports non-enforcement – and elections are coming this year. Many venture capitalists and institutional investors have been equally reluctant to invest in the sector. MassRoots Inc.’s (OTCQB: MSRT) treatment at the Consumer Electronics Show (CES) and in previous years at Tech Crunch Disrupt is a sign of just how taboo cannabis start-ups remain in the general public. Of course, there are a few notable exceptions including Peter Thiel’s Founder’s Fund, which invested $75 million in Privateer Holdings. These dynamics forced many companies to pursue one of two options. First, companies can undergo an expensive and time-consuming process to try and raise angel investment rounds from high net worth individuals, but that’s difficult because there’s no good exit strategy without VC involvement. Second, companies can list their stock on over-the-counter exchanges, but that involves regulatory hurdles and high costs associated with auditing and making filings. Regulation A+ Crowdfunding Changes the Game For the past 80 years, only accredited investors that make over $200,000 per year or have at least $1 million in assets (excluding their personal residence) could invest in start-ups and the process was difficult, but the so-called Crowdfunding Act is quickly changing the rules. Title IV of the JOBS Act has opened the door for start-ups to raise up to $50 million from the general public under what is called Regulation A+ Tier 2, which was adopted by the SEC and went into effect in June 2015. While it still costs $50,000 to $100,000+ to audit financials and make regulatory filings, the process is far cheaper than the cost of a reverse merger, SB-1 transaction, or traditional IPO that can cost in the millions of dollars. The cost of remaining a publicly traded company are also much lower with Regulation A+ thanks to fewer mandated SEC audits, regulatory filings and other requirements. “The original Reg A had a state-by-state registration requirement and was prohibitively expensive for issuers,” says Darren Marble, CEO of CrowdfundX. “Reg A+ Tier 2 offerings pre-empt state securities registration, which reduces costs for issuers. More importantly, Reg A+ allows for both unaccredited and accredited investors to invest in private companies, and empowers those companies to market their offerings through the Internet.” Michael T. Williams, an SEC attorney with Williams Securities Law Firm, P.A. noted many other benefits of Regulation A+ compared to traditional S-1 offerings, including:

Continue Reading: Crowdfunding Cannabis: Marijuana Start-ups Get the Capital They Need – CannabisFN

Crowdfunding Bill Moving Swiftly Through Arizona Legislature

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When people hear the word “crowdfunding,” websites such as Kickstarter or IndieGoGo usually come to mind.

Those sites provide a platform for people to donate money to charitable events, help a music band launch a new album and help local businesses get off the ground.

But if a private company wants to raise money through shareholders, similar to selling shares a public stock exchange, the general public can’t participate by federal and state law. That’s reserved for only “accredited investors,” or wealthy, financially savvy individuals.

But that could soon change in Arizona.

House Bill 2591 would allow “equity crowdfunding,” meaning any Arizona resident with any income could buy stock in a locally based private company.

The idea behind equity crowdfunding is to create a new avenue for small businesses and start-ups to gain access to capital they otherwise couldn’t obtain through traditional routes, such as a bank, angel investor or venture capitalist.

“They’re struggling to find those earlier and smaller amounts of funding,” said Sidnee Peck, director of the Center for Entrepreneurship at Arizona State University’s W.P. Carey School of Business. “So they’re not quite ready for an angel group, they’re definitely not ready for venture capital and they don’t have what a bank typically requires in order to get a loan. So they might be stuck needing $10,000, $20,000, $50,000 and they just can’t obtain it.”

During a Senate Financial Institutions Committee hearing last week, Senator David Farnsworth said he thinks it’s one of the most important bills this session.

 “I have yet to find someone who is not in favor of this most important piece of legislation,” Farnsworth said.

The basis for the bill stems from the Jumpstart Our Business Start-Ups Act, also known as the JOBS Act, signed by President Barack Obama in 2012. A portion of the JOBS Act required the Securities and Exchange Commission, which regulates the nation’s securities industry, to create new rules to allow equity crowdfunding nationwide.

Those rules were supposed to be in place by December 2012, but the SEC still hasn’t acted.

Thus, some states began taking matters into their own hands.

About 15 states have passed their own equity crowdfunding laws so far and Arizona is among several currently considering doing the same.

These state laws allow crowdfunding only if the business and investors are located within that state. Crowdfunding can’t happen across state lines until the new SEC rules are in place.

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Colorado Proposes Crowdfunding Act

Flag-of-ColoradoColorado this week became the latest state to attempt to speed up the process for ordinary residents to invest in a private start-up company.

The proposed Colorado Crowdfunding Act would open up the potential pool of investors that start-ups can approach for funding.

By law, only accredited investors can buy stock in a private company today, and such investors must make at least $200,000 annually and have a $1 million net worth.

The bill allows any Colorado resident to invest up to $5,000 in a company without the need for accreditation.

“The challenge right now with a Colorado company trying to raise money is if they want to get outside investors, wealthy investors or venture capitalists, they have to go through such a labyrinth of securities laws and lawyers,” said bill sponsor Rep. Dan Pabon, D-Denver, during a press conference Wednesday. “The overwhelming cost and burden is on that particular business.”

Pabon’s bill would require the company and investor to be based in the state and that 80 percent of the proceeds of investment is spent here. House Bill 1246, introduced Tuesday, limits it to companies raising $1 million — or $2 million if they provide audited financial statements.

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Bennet, Merkley Press SEC to Finalize Crowdfunding Rules

Washington, DC – U.S. Senators Michael Bennet (D-CO) and Jeff Merkley (D-OR) called on the Securities and Exchange Commission (SEC) to finalize its crowdfunding rules that will allow small businesses and start-ups to raise capital online and through social media.

Bennet and Merkley were lead sponsors along with former Republican Massachusetts Senator Scott Brown on the bipartisan CROWDFUND Act, which was passed on April 5, 2012 as part of the JOBS Act, which allows small businesses to raise start-up capital on the internet.

In a letter to SEC Chair Mary Jo White, the senators wrote, “The law directed the SEC to promulgate the necessary rules within 270 days of the enactment of the Act. The proposed rules, however, were not published for public comment until over 500 days later, on October 13, 2013. The comment period for the proposed rules closed on February 14, 2014. Despite the fact that finalizing the rules has been a stated Commission priority for all of 2014, the rules governing this crucial new source of financing have still not been finalized.”

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New bill could finally fix crowdfunding — if the sausage stuffers don’t get to it!

sausage-v.SMPeople say that Washington, D.C. is where the sausage gets made because incentives, interests, and compromises worm their way into bills as they go through Congress.

A bill that is submitted to the U.S. House by one or more representatives must gain the support of a committee before it moves to the full house for a vote. On average, less than 1% of all bills that are submitted for consideration actually reach the President’s desk for signature. Amazingly, equity and debt crowdfunding was one of those bills. Even though what was signed into law was not perfect, it is a workable solution and Congress should be congratulated for seeing the opportunity in crowdfunding for American entrepreneurship.

In the proposed rules, the SEC ran a cost benefit analysis of the crowdfunding legislation. (You can see our take on it in this VentureBeat piece: It might cost you $39K to crowdfund $100K under the SEC’s new rules). These costs were the impetus for a legislative fix on Capitol Hill — and that bill has entered into committee.

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Many States Aren’t Waiting for the SEC

The Jumpstart Our Business Startups Act was signed into law in April 2012 and the Securities and Exchange Commission has been developing regulations ever since to implement the law’s provision that would allow companies to raise capital through equity crowdfunding.

Those regulations still have not been finalized.

In contrast, Georgia, Kansas, Michigan, Alabama and Maine already have laws and regulations that allow crowdfunding within the states. A new law in Washington state awaits the governor’s signature. In Wisconsin, new rules will take effect June 1 and in Indiana, new regulations become official July 1.

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A dozen other states are developing crowdfunding regulations. Securities regulators in Texas are ready to announce new crowdfunding regulations, according to local news media. Connecticut has a state-sanctioned study under way.

Two states, New Mexico and Mississippi, have already considered and abandoned crowdfunding legislation.

In fact, while the SEC has sought to locate the delicate balance between making it easier for small companies to raise capital and protecting unaccredited investors, almost half the states in total have moved toward their own intrastate regulations.

“There is a level of frustration out there over the delays by the SEC, and I think the states are simply trying to plug a hole,” said Douglas Ellenoff, a partner with the law firm of Ellenoff Grossman & Schole LLP in New York.

 

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