Below is an article by The Wall Street Journal entitled “Businesses Aim to Ride New Funding Wave”.
Businesses Aim to Ride New Funding Wave By: Ianthe Jeanne Dugan, The Wall Street Journal September 9, 2013
Bob Carbone, who runs a technology startup in upstate New York, said he can’t tap a bank for capital and “it’s difficult to find local investors.” So he is thrilled that on Sept. 23, he will be allowed to start wooing small investors nationwide with ads—online, in newspapers, on TV, on billboards or T-shirts.
That is when the Securities and Exchange Commission will lift an 80-year ban preventing privately held businesses from advertising for investments, helping usher private businesses into the world of “crowdfunding” that has largely been limited to donations. In crowdfunding, individuals pool money for initiatives by other individuals or organizations.
Less excited are some state regulators who fear the relaxed rules could stoke scams and losses as businesses court individual investors to raise money.
“We’d like to figure out a way it can be successful,” said Chris Naylor, securities commissioner in Indiana. “But there is a danger of fraud.”
Currently, businesses aren’t allowed to advertise to raise money. They can raise funds only if they register a securities offering with regulators or have an exemption, such as selling only to accredited investors, those who have at least $1 million in net worth or $200,000 of annual income.
That will change under the Jumpstart Our Business Startups, or JOBS, Act passed by Congress last year. While businesses will be allowed to advertise to everybody, they initially still will be limited to accepting money only from accredited investors. By next year, they will be able to accept funds from all investors. This will give businesses a foothold into crowdfunding.
Some $1.6 billion was raised through crowdfunding last year, according to research firm Massolution, and an estimated $3.7 billion in 2013.
This lending method, which has taken off in other parts of the world, is part of a shadow-banking system that has been expanding in the U.S. after the financial crisis made it more difficult to borrow through conventional lenders.
Until now, crowdfunding has been confined largely to donation-based platforms such as Kickstarter. Investors aren’t promised a piece of the business or a profit. For instance, fans who pooled money for Spike Lee’s new movie as part of a recent crowdfunding effort didn’t get a financial cut, just the satisfaction of knowing they helped fund a project they believed in.
“This is the most radical and innovative change to capitalism and finance in 80 years,” said Judd Hollas, who runs EquityNet, a platform that brings together investors and entrepreneurs. Without advertising, EquityNet has helped businesses raise $200 million from private investors and companies since it formed in 2005.
In the U.S., he said, several million investors are participating in platforms like EquityNet. “Now, there will be access to 50 million people,” he estimates, with $5 trillion in their investment portfolios.
Calvin Goforth, who runs VIC Technology Venture Development LLC of Fayetteville, Ark., runs 14 companies built around technologies licensed from universities, ranging from biotechnology to food safety to medical devices. “You can’t get loans from a bank for these types of companies,” said Mr. Goforth, who intends to unveil ads on EquityNet for at least one company. “They don’t have collateral. They have intellectual capital. There is a tremendous commercial upside, but they can be very risky.”
State securities regulators are gearing up to confront the new landscape. In Massachusetts, Secretary of the Commonwealth William F. Galvin has put together a task force of 15 people to comb the Internet in search of potentially dubious claims. In December, the state filed civil allegations of illegal crowdfunding against two oil companies.