Equity Funding Blog

Crowdfunding Is Not For The Shy

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Love and money. The emotional risks are high for both.

The comparison was drawn by Judd Hollas, CEO of EquityNet, the online service that connects “accredited investors” with startup companies seeking funding. “It’s a human-to-human engagement,” he said.

Fayetteville, Arkansas-based EquityNet, with an Austin office, anxiously awaits the U.S. Securities and Exchange Commission’s rules associated with a law approved by Congress in April 2012. The law allows companies like EquityNet to broker crowdfunding investments between startups and anyone, not just accredited investors.

Accredited investors can be people with $1 million or more in assets or anyone with annual income more than $200,000.

However, when anyone can invest, with limits based on their income, crowdfunding could expand exponentially. Hollas sees the relaxation of the rules and the larger investor base as something that will help young companies grow and boost the economy, while bypassing venture capitalists and banks.

“The No. 1 reason of business failures is access to capital,” Hollas said. “Being inadequately capitalized limits success … Less than 5 percent of U.S. companies have the growth rate that venture capitalists want to see. Only about 20 percent have the tangible collateral, or equipment, banks need to make loans.”

That leaves about 80 percent of companies that could use investments from the public at large. Since 2013, companies legally could advertise their need for crowdfunding but could accept it only from accredited investors.

The 2012 law opens it to everyone, again with limitations based on individual incomes, but the pending SEC rules are needed for the activity to start nationally. That could take up to 10 years, Hollas said.

Companies like EquityNet therefore are watching the Texas State Securities Board, which, like other states, could jump ahead of the SEC and allow Texas investors to fund Texas companies under state rules.

Texas approval could happen as early as this month and begin by the end of the year, Hollas said.

Is crowdfunding risky? You bet. Every cent is at risk, but this happens all the time anyway, Hollas pointed out, with the day traders who use E*Trade and other online investment sites.

Hollas acknowledged that investing in startups listed on EquityNet’s website is riskier than investing in stocks traded on traditional exchanges, maybe even 10 times riskier. A startup firm has only a 50 percent to 60 percent chance of surviving to its fourth year, he said.

“But the return can be so much higher, too,” Hollas said.

The risk is the reason for income limitations, which could be, for example, 5 percent to 10 percent for someone with a $100,000 annual income, or $5,000 to $10,000.

The other aspect investors need to watch are the rules set by the startups seeking investments. They set funding goals, such as $1 million, but can hold investments in abeyance until they disburse investments to operations at, say, 50 percent of the goal.

At that point, investors have no liquidity. They have to wait for profits to materialize. But liquidity could come soon if crowdfunding secondary markets appear so investors can trade shares between themselves and have exit points if they need them.

“We’re starting to see this emerge,” Hollas said. “In a year or two, this will become full-blown. It’s something we’re looking at.”

In Texas, where EquityNet deals so far with only accredited investors, the company does business with 500 Texas investors and has listed 200 Texas companies since its 2005 start, said Hollas, a Schulenburg native. A handful of San Antonio startups are listed on EquityNet’s website.

Online companies like EquityNet offer screening tools to guide potential investors. They can screen by type of industry, location, management experience levels and the most-viewed investment opportunities. Capsule versions of company business plans are displayed online. Once investors register, they can request more information and send questions to companies before placing money, Hollas said.

Incubators that help companies start are using sites like EquityNet to find funding, he added. Cisco Systems Inc. is an example of a company that steers new cloud-computing firms toward crowdfunding so the companies then will purchase Cisco servers.

EquityNet started nine years ago before crowdfunding was even a term. What was it called then? “The wild West,” Hollas said as a joke. That’s another way of looking at crowdfunding, especially when it is thrown open to everyone. It’s risky, just like love.

This article was originally published in San Antonio Express-News.