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Equity crowdfunding: Investing in emerging biz

Updated: 
May 2, 2016 - 9:07am

Happy National Small Business Week, May 1-7!

How many of us haven’t said something like “if only I had invested in (fill in the blank: Starbucks, Whole Foods, etc.) back when they were getting off the ground? I’d be set now!”

How many startup entrepreneurs have said something like, “I need financing to put my business plan into action but my bank will only lend me money if I already have money!”

Well there’s a new option for business investing coming May 16 that opens doors that were formerly closed to most. It gives investors a chance to win (and lose) big and provides entrepreneurs with a new source of funding. Who knows if this will become a financing revolution or the flavor of the month, but a lot of people are betting on it and business owners and owner wannabees need to pay attention.

Here’s the background. For the past 80-some years large scale investing in non-publically traded businesses was limited to venture capital funds or companies, or to “angel” investors. These last are high net worth individuals, “accredited investors” per the Securities and Exchange Commission, making more than $200,000 a year or with a net worth of more than $1 million (not including their residence). That leaves out most of the general public. So you had to be in the loop or pretty well off to get in on the ground floor of a good thing. You could of course have non-accredited investors, your friends and relatives, invest in your business but according to the SEC only if you didn’t advertise your offering, and only if you didn’t get more than 35 investors.

This all changed in 2012 when Congress passed the JOBS (Jumpstart our Business Startups) Act. The act is made up of many moving parts, but the part in question here is the ability of companies to advertise to the general public for investment through “equity crowdfunding,” which goes into effect May 16.

You may be familiar with crowdfunding, which is a relatively new phenomenon that lets companies and individuals raise money online. As of 2012 there were 191 crowdfunding websites based in the US and another 243 in the rest of the world, which raised $2.7 billion that year, a figure that rose to $5.1 billion in 2013.

A contributor to a crowdfunding effort may be motivated to contribute because it’s for a cause they support or because they like a business or project idea and want to be part of getting it going. There is “rewards based” crowdfunding where you get something back like a product, and “donation based” crowdfunding where you get back the satisfaction of helping a good cause. But you don’t get money back; you don’t get “equity,” ownership, in the object of the crowdfund.

With equity crowdfunding you do get ownership, a piece of the action. But up until now to get that piece you needed to be an accredited investor. Starting on May 16 that all changes with the implementation of “regulation crowdfunding.” This means that anybody can invest in publically advertised, equity crowdfunding subject to certain criteria. Everyone can invest at least $2,000 a year and based on income and net worth some people can invest up to $100,000. The caveat to equity crowdfunding is that you must do this through a “funding portal,” an online, government registered intermediary.

I am delighted to report that one of those funding portals, San Francisco and Boston based Wefunder.com, recently selected two locally based businesses to offer to investors through equity crowdfunding: Chris and Aniko Somogyi’s Anikona Farm, which produces coffee in Holualoa, and Neil Sim’s Kampachi Farms, an aquaculture enterprise based in Kona and Mexico. Best of luck to these two innovative local enterprises in attracting investors! I’m hoping they can pave the way for other emerging businesses here in Hawaii.

One particularly intriguing idea is the opportunity that a site like Wefunder offers to community investment groups to help fund venture capital projects that benefit local businesses and the community. So a Big Island or a Kona-Kohala investment club, for example, is a possibility. Such a group could be housed with a local organization sponsor, set up criteria by which projects could win group support, assess projects according to those criteria, and then submit the ones chosen to a site like Wefunder to manage and offer nationally. This could provide another source for business financing and community economic development. The community could use one.

Think about it.

Be advised: the devil is in the details; we do not advocate any funding source over another and recommend that any business conduct a thorough evaluation before any financing actions.

Join us for our next class, How to Start a Business in Hawaii Wednesday at NELHA Gateway Center. Register at 327-3682 or online at (www.hisbdc.org).

Dennis Boyd is the West Hawaii Center director, Small Business Development Center. He writes a monthly column and can be reached at 327-3680 or Dennis.Boyd@hisbdc.org. All opinions, conclusions or recommendations expressed are those of the author and do not necessarily reflect the views of the SBA.

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