The Business of Crowdfunding ‘Three Pointers’ | Take Two

 
crowd-fundingWelcome to my second edition of “Three Pointers”.  I guess the first edition was well received, because this week I actually have 4 points of view, and this week I’ll be highlighting the Crowdfunding industry.  Ever heard of “crowdfunding”, it’s a term used to describe a process where an individual, a company, a 501 C3 and virtually anything in between, can use mass communications as a means of raising funds for their organization.  An individual who has an invention and needs capital to bring his/her invention to market can use crowdfunding to ‘sell’ others on their idea.  A company who needs a loan to purchase new equipment, can crowdfund their need to a wide range of angel investors, and secure capital.  As we will see from our experts, Crowdfunding has changed the landscape in a very positive manner.  This is going to be fabulous for individual investors looking to share their capital on a small scale, and its going to allow small startups to be able to build a business free from the chains of debt.
 

First up is the National Crowdfunding Association:

The National CrowdFunding Association was formed in March, 2012, prior to the passage of the JOBS Act of 2012 authorizing equity crowdfunding in America.  We provide our members with opportunities to shape the industry, learn the details of the marketplace, stay informed and stay ahead, and the opportunity to network with others involved in this revolutionary new way of financing. The mission of the National Crowdfunding Association is to support, educate, and protect the American crowdfunding market.   We represent the interests of both the investor and the entrepreneur in every crowdfunding transaction, whether it is an equity/debt, reward or donation crowdfunding opportunity.

Lauren Leibowitz has experienced the financial industry from the inside out. She began her career while attending the University of Miami where she interned at 1st BridgeHouse Securities, a boutique Investment Bank and 1st BridgeHouse Consulting, a regulatory consulting firm for all capital market participants. Upon graduation she began full time at 1st BridgeHouse where she worked along side other Broker Dealers and RIA compliance officers to develop and execute their compliance programs, acted as a liaison between the regulators and the firm on a daily basis and throughout an audit. Lauren has developed 1st BridgeHouse University, which provides solutions for Broker Dealer’s Firm Element Continuing Education program. Lauren is currently a principal of 1st BridgeHouse Securities where she assists the compliance program and conducts research on potential investment opportunities. Since the passing of the Jobs Act in 2012, Lauren is a partner at eBarnRaiser, llc where she is developing various crowdfunding portals under the different titles of the Jobs Act, specifically II and III, to provide the 21st Century Investment Bank to investors and issuers. Her background in compliance and operations of a Broker Dealer and knowledge of investment banking has provided a great source of experience and knowledge in the crowdfunding space. Lauren volunteers as the administrator for the National Crowdfunding Association.

 How has the Jobs Act changed the landscape of crowdfunding?



The JOBS Act has prompted the most changes in financial regulation since the Securities Exchange Act from 1933. There are 3 types of Crowdfunding, Donation, Reward and Equity/Debt. Donation and Reward Crowdfunding is available today, but equity Crowdfunding which creates a security for the “supporter” falls under the supervision of the SEC which was promoted by the JOBS Act. There has always been exceptions that companies looking to raise capital can qualify for, but with the passing of the JOBS Act its provides additional exceptions for companies. These exceptions allow for the financial industry and companies to leverage the available technology to facilities their capital raise on an online portal to the crowd. The Jobs Act makes investment banking accessible for companies by being affordable while also making investment opportunities more visible to the crowd.

How is crowdfunding useful for startups and small to medium sized businesses?

Since crowdfunding is facilitated through online portals, it shifts the capital raise / investment banking process from a country club, privileged model to a public, main street accessibility. Then in return online crowdfunding portals provides awareness of and marketing for the company. Raising capital for a company has been an expensive process due to the fees for required documentation and consultations with business professionals (lawyers, accountants etc…). Crowdfunding will now be an affordable service and will increase the accessibility and visibility to Main street investors as well as Wall street investors. Crowdfunding can help start ups receive the proof of concept needed to execute large orders and prepare for the future to operate on an more economically.

What is your opinion regarding the future of crowdfunding?

Presently crowdfunding is in its last trimester and we are anticipating and planning for the day the SEC/ FINRA releases the final rules. We are are hopeful and anticipate final rules to be released in Q3 of 2014.  Crowdfunding democratizes the investment banking / capital raise process for companies and investors.  I anticipate crowdfunding campaigns to be apart of everyday conversation.   A lot of the initial opinions about crowdfunding were concerned about the amount of fraud that would take place, but I believe this is not a major concern since portals are building in strict controls to verify companies, their management, and their campaign offering. Before a company can post a campaign on a portal there is a lot preparing and planning needed to be live and appear credible to the investors. If something appears suspicious the investor needs to ask! This is the time for supporters and business owners to read, learn and ask about crowdfunding. Education is key at this point! This is only the beginning…


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Carlo Tabibi
Co-founder and CEO
Patch of Land, Inc.
http://patchofland.com
 
For the past 20 years, Carlo has been operating, developing, and investing in real estate, both domestically and overseas. For the past 5 years, he has also been lending to real estate operators through the hard money marketplace. Carlo has built multiple online retail businesses during this time, including the $80M Tabcom.com where he was a co-founder, and the incentives program provider perks.com where he is currently Chairman.
 

 How has the Jobs Act changed the landscape of crowdfunding?

 The JOBS Act has changed Crowdfunding from a donation based to equity (ownership) based business model. Before the JOBS Act, Kickstarter, Indiegogo and co. allowed people and small businesses to raise money in return for recognition, products, services or prizes. Now, the JOBS Act takes that one step further, turning Crowdfunding into a viable source of raising capital to start and grow a business, and in return the funder is essentially an investor who receives a share in the company’s profits and business.

How is crowdfunding useful for startups and small to medium sized businesses?

The purpose of crowdfunding is to allow start-ups, and small to medium sized businesses to raise money from a much wider investor base than ever before. Traditionally, a small business would seek funding in the form of loans from banks, apply for grants, and seek capital from wealthy private investors or through institutions and venture capital firms.  Unfortunately these options are not viable for every small business, so through crowdfunding, they potentially have easier access to funds, and at a lower cost of capital.

 What is your opinion regarding the future of crowdfunding?

The world will totally change because of it, new products are being made that were previously impossible, new ideas are being brought to life, people who previously didn’t have access to these deals are now able to make money, do good and have fun doing it. Crowdfunding will revolutionize the growth of business and of innovation.

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Charles Luzar
Crowdfundinsider.com
 
Charles Luzar is the Director of CrowdfundInsider.com. He was formerly a web developer for a prominent Ohio newspaper publisher. Charles maintains tech operations and produces content for Crowdfund Insider. He is on the PR committee of the Crowdfunding Professional Association.
 

How has the Jobs Act changed the landscape of crowdfunding?

Rule 506(c) has already spurred quite a bit of activity. One look at an AngelList or Return on Change or SeedInvest and you can already see the promise of investment crowdfunding. I hope that equity crowdfunding for the masses only serves to advance this. I’m not an accredited investor. Do you know how exciting it is that I may be able to make privately-held US small businesses a part of my greater investment portfolio? That’s a tectonic shift. I don’t want to be limited to patronizing the businesses in my neighborhood and I don’t want to watch my favorite startups from the sidelines. I want to actively participate in the march to success and share in a bit of that success, too. Soon that will be an option for me as it will be for the entrepreneurs I believe in.

How is crowdfunding useful for startups and small to medium sized businesses?

It’s important to remember how we got here. Crowdfunding began to take off in the wake of the financial crisis as banks tightened up and limited small business lending. As more traditional options were limited, it was extremely important to offer new ways to raise capital. Data shows that entrepreneurs were increasingly leaning on credit cards to fund their businesses, for example. That’s untenable. That’s why we are where we are today. Entrepreneurs in need of capital can consider all of their options – bank loans, peer-to-business loans, equity crowdfunding under various exemptions, non-dilutive crowdfunding models and yes, even the dreaded credit cards – and pick the solution that makes sense for them.

There are certain types of companies that are better suited for crowdfunding than others. Those with a strong base of support in the crowd, companies with novel products coming to market or those poised to be disruptive in emergent industries – these types of companies would be crazy not to at least kick the tires on a crowdfunding campaign. Again, it isn’t the only option, but it is an option and it warrants serious consideration.

What is your opinion regarding the future of crowdfunding?

I think the future is bright, but there is a lot of work to do in the form of outreach and education. It’s a challenge we’re trying to help solve at Crowdfund Insider, and we aren’t the only ones; there has been an enormous effort on the part of industry stakeholders and advocates, and that effort deserves recognition. Issuers need to know and understand how they can use this opportunity, and investors need to understand the risks and potential rewards involved with investing in early-stage companies. If we have well-informed issuers and well-informed investors participating in this marketplace, the sky is the limit.

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Brian Knightcrowdcheck.com
Vice President for Platform Services
CrowdCheck Inc.
www.crowdcheck.com
brian@crowdcheck.com
 
Brian R. Knight, Co-Founder and Vice President for Platform Services at CrowdCheck, has experience as both an attorney and an entrepreneur.  Brian has served as an attorney in the private sector and for the Federal Government.  He also started and ran Publius Incorporated, a business focused on improving constituent communications with elected officials.  Brian brings his unique experience with both the legal and entrepreneurial worlds to CrowdCheck, allowing him to effectively address the needs of startups.

How has the Jobs Act changed the landscape of crowdfunding?

The JOBS act allows for the sale of a company’s securities, as opposed to the presale of product or donations.  This opens up the “crowdfunding” market and methodology to companies that perhaps couldn’t present a compelling case in the pre-sale or donation space.  For example, consumer product companies, especially tech gadget companies can do very well with traditional crowdfunding if they have an interesting product people want to buy (think Pebble watch), but what if you are a plumbing supply manufacturer? It would probably be harder to sell people on the idea of funding you in exchange for a pipe – but if you are a good business, and can provide a return on investment, either by making payments on a bond or providing the possibility of a profitable equity exit, you can be attractive to investors.

How is crowdfunding useful for startups and small to medium sized businesses?

It will provide another avenue to pursue capital, and depending on the business’s unique situation it may be a much better avenue.  While there are a ton of question yet to be answered about the crowdfunding market it is very possible that companies outside traditional funding hubs will be able to tap local funding, and companies that may not be attractive for institutional investors because they are not in a sufficiently “high growth” industry will find people who are looking for something to help diversify their portfolio or be willing to accept a smaller financial return because they have a personal connection to the company.  However, it will be important for companies to understand what type of offering makes sense for their business.  Not everyone is going to be a compelling equity offerer, but if you can make your payments a debt offering can make sense.  

What is your opinion regarding the future of crowd funding?

I think it can make a real positive contribution to the economy, but only if both issuers and investors are smart about it.  There is a lot of talk about investors getting in on “the next Facebook” and that might happen, but the majority of companies are likely to be more “ main street”, there is nothing wrong with that, but different expectations are warranted. Likewise, companies are going to have to think about what having a bunch of new investors they met over the internet is going to mean for their business and make certain they can handle that.  With all that said, if people have reasonable expectations and are smart about it crowdfunding has the potential to be a major asset for small businesses and investors.

 

 

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