Crowdfunding

From Doughnuts to Bionic Organs, Entrepreneurs Start Raising Under Regulation Crowdfunding

Amy Cortese | May 16, 2016

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Bionic organs, doughnuts, co-working spaces and whiskey: these are just a few of the first ventures to raise money under newly available Regulation Crowdfunding rules. Although just a handful of funding portals have received the regulatory greenlight to operate, more than two dozen small businesses are launching fundraising campaigns today as the new rules—which open up investment crowdfunding to all investors—go into effect.

Many observers expect this new form of investment crowdfunding to get off to a slow start as investors, entrepreneurs and the professionals that advise them get comfortable with it. And the final rules are far from ideal. But the variety of businesses ready to go on Day 1, and the large numbers of unaccredited investors that have opened up accounts on funding portals, suggest widespread pent up demand.

“I wanted to be a part of this early on because I could see the long term effects this business model could have on breaking down the barriers to true innovation,” said Lynn Walder, an executive assistant who lives in the Boston area and opened an account on WeFunder. “Hopefully,” she added, “it will put some wealth creation back into the hands of the average salaried person.”

On the WeFunder site, she and more than 50,000 other investors that have signed up will be able to choose from around 20 companies that plan to kick off Regulation Crowdfunding, also known as Title III, fundraising campaigns today. They include ventures such as Urban Juncture, a development that is creating a Black food, cultural and community gathering place for the historic Chicago neighborhood of Bronzeville.  The company is seeking $25,000 through the offer of 10-year promissory notes that pay 5% interest.

Others have more of a tech spin, such as Beta Bionics, an artificial pancreas that automatically administers insulin and glucagon to regulate blood sugar levels for children with Type 1 diabetes. The “bionic” organ was developed by a biomedical engineer whose son has Type 1 diabetes.

Beta Bionics is also a Massachusetts Public Benefit Corp., a legal structure that allows it to consider social mission alongside profit. Part of that missions is to act in the best possible interest of the T1D community in connection with fulfilling the Beta Bionics’ corporate functions,” according to the company’s web site.

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Cleveland co-working space SmartMart is offering shares and desks

Other companies listed on WeFunder include Slingfin, an outdoor gear and tent maker, Hawaiian Ola, a maker of natural beverages, and Rodeo Donut, a Seattle pop-up-turned-restaurant serving fried chicken, coffee and its signature brioche doughnuts. There’s also a DIY genetic engineering kit.

Over at SeedInvest, where 100,000 investors have signed up, StartMart Cleveland is looking to raise $1 million from investors. The company, which runs a 28,000-square foot co-working space for startups that opened recently in downtown Cleveland, is offering preferred shares priced at $10 (with a $2,000 minimum investment) along with an open membership desk at the facility.

StartMart CEO Charles Stack has used Title II for another venture, FlashStarts, a startup accelerator and venture fund that is housed in StartMart. But he is excited about the potential for Title III.

“There’s a certain type of magic that happens when customers become shareholders,” says Stack, whose goal is to grow StartMart into the world’s largest member-owned and operated co-working space. “Title III will be great for restaurants, co-working spaces like us, local businesses and any small business that has a loyal customer base.”

Paul LaPorte, CEO of MF Fire, a startup that uses combustion science to produce a clean and efficient wood burning stove, echoed Stack’s remarks. Title III, he said speaking generally, “provides a new alternative to traditional venture capital and angel investment.” He added that companies with a compelling and easy to understand concept can use the rule to “create brand ambassadors.” MF Fire is seeking $1 million in the form of a convertible note on SeedInvest.

Although Title III allows companies to generally solicit their offerings, they must direct potential investors to the crowdfunding portal for anything beyond basic offering information. They must also walk a careful line when talking to the media, which means sticking to facts, lest their comments be construed by regulators as solicitation.

The JOBS Act was signed into law in April 2012 in an effort to free up more capital for small business investment. Regulation Crowdfunding, or Title III, is the last provision to go into effect. It’s been particularly contentious, since it reverses more than eight decades of securities laws that have made it extremely difficult for private companies to raise money from all but the wealthiest investors. While that opens up a huge pool of untapped capital for small business investment, critics worry that it will expose small investors to risky deals.

“This is one of the greatest advancements for entrepreneurs in a generation,” said Ron Miller, cofounder & CEO of StartEngine, an LA-based crowdfunding platform that was among the first to be approved for Title III. StartEngine, which has attracted some high profile Reg A deals, has a few companies raising money under the new Title III rules, including a West Virginia-based distillery and and a music booking platform. Miller expects to add another 10-15 over the coming weeks.

Still, four years after the JOBS Act was signed into law, some of the initial excitement for Title III—arguably the most revolutionary part of the Act—has died down. Many funding platforms have moved on to other types of crowdfunding, such as Title II, which has allowed private companies to publicly raise money from wealthy “accredited” investors for more than two years. Other have simply given up. All told, some 30 platforms have filed to operate under Title III and most have yet to complete the regulatory process.

In the meantime, the modest start to mainstream investment crowdfunding may help set more realistic expectations.  “Slow and steady growth is a positive,” said Doug Ellenoff, of law firm Ellenoff, Grossman & Schole. “This is all a figuring out process.”

Even some entrepreneurs are taking a wait and see view. “It’s an interesting time,” says LaPorte of MF Fire. “A lot of people are on the naysayer side. Others see this as a very disruptive change to the financial system that levels the playing field for a lot of people.”

“In ten years,” he continued, “well know the answer.

For more, see our Regulation Crowdfunding FAQ

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