Some entrepreneurs skeptical of state's new tool for raising capital
Advocates say Washington state’s new mechanism for raising startup capital in small increments from many people will expand the pool of investors, but some entrepreneurs are skeptical.
Seattle Times business reporter
The Washington Jobs Act of 2014 allows small businesses to raise funds through equity crowdfunding. The law and proposed rules allow:
• Investors to invest $2,000 or 5 percent of their annual income or net worth. If a person’s annual income or net worth is more than $100,000, he or she can give 10 percent of that net worth.
• Businesses can raise up to $1 million annually.
• The offering is only available to Washington-based companies.
• Only Washington citizens can invest.
• Businesses must provide the state and potential investors a number of documents including a copy of the business plan, financial statements and a copy of all advertising materials.
The proposed rules can be found on the Department of Financial Institutions website: www.dfi.wa.gov/sd/rulemaking.htm#crowdfunding
In mid- to late July the DFI will release a formal proposal and will have another public- comment period. The rules are expected to be finalized by October 2014.
Michael “Luni” Libes thinks he has a great idea for a business but is worried no wealthy investors will help fund his startup.
“It’s a business accelerator for socially conscious companies,” Libes said. “It’s in a space that doesn’t have a lot of investor capital.”
But Libes, an entrepreneur and instructor at the Bainbridge Graduate Institute, a 12-year-old accredited business school, is hopeful a new state law will allow him to try to raise money in small increments from a large group of investors through crowdfunding.
Advocates say the Washington Jobs Act of 2014 will let less-wealthy people participate in startup deals and will expand the pool of investors, although some entrepreneurs are skeptical the equity-crowdfunding mechanism will get much use because of its regulatory requirements.
Small businesses and other projects have raised more than $1 billion on crowdfunding sites like Indiegogo and Kickstarter, which were founded in 2008 and 2009, respectively.
Campaigns run through these sites can fund businesses, art projects and even feature films. People who contribute get the promise of material goods or the good feelings that come from helping out. They don’t get a share of the business.
The new law, by contrast, allows state-based small businesses to raise money through crowdfunding and incentivize people with stock in the company, making them part owners.
“It makes it easier for entrepreneurs to be seen by investors,” Libes said. “And the investor pool is a lot bigger.”
In March, Washington joined six other states with laws that would allow small businesses to raise capital through crowdfunding on a state level.
The Department of Financial Institutions released proposed rules for the crowdfunding offering June 6, and is reviewing comments from the public through the summer.
Bill Beatty, securities administrator for the Washington Department of Financial Institutions, said the department plans to have the rules in place by October.
In the past, entrepreneurs and startups could usually only solicit investments from accredited investors — meaning venture capitalists, angel investors and others worth over $1 million.
But the new mechanism will allow any Washington citizen to invest $2,000, or 5 percent, of his or her income in a Washington-based company seeking capital through crowdfunding. People who make more than $100,000 a year could give up to 10 percent of their net worth or annual income.
Small businesses are allowed to raise up to $1 million per year through the equity-crowdfunding offering. Libes said he doesn’t know yet how much he will seek.
In 2012, Congress passed a bill to allow businesses to raise capital through crowdfunding, but the Securities and Exchange Commission is still working on the rules to implement that.
“We don’t know when or if that federal rule-making will go out,” said Beatty.
According to the proposed rules for Washington’s crowdfunding offering, before a business can start raising money it will have to give the state and potential investors a lot of information, including a business plan, financial records and information on planned advertisements.
Just like other crowdfunding ventures, the company has to set a goal for how much it plans to raise within a certain time frame. If it does not meet its goal, the investors would get their money back.
Some people think the upfront costs and the time and effort to prepare documentation for the crowdfunding offering will keep it from catching on. The state will require extensive financial records produced by an accountant, documents that need to be looked at by an attorney, and a $600 filing fee.
“I will probably not ever use this bill,” said Adam Lieb, a self-described “career entrepreneur” and the CEO of Duxter, a company that builds tools for gamers and video-game developers. “It matters how expensive it will be.”
Liebsaid he has developed a network of wealthy individuals who invest in startups, so it would be cheaper and easier for him to raise money through accredited investors. But crowdfunding could make sense for those without a list of millionaires in their back pocket, he said.
In the late 1980s, Washington adopted the Small Company Offering Registration, similar to the proposed crowdfunding offering, which allows small businesses to raise capital from non-accredited investors; approval from the state is necessary before beginning to sell stock.
The Small Company Offering Registration is rarely used. In the last five years, only 10 businesses applied to use it, Beatty said. The state permitted only six of those to use this offering and only four have done so successfully.
Because of these numbers, Beatty said the Department of Financial Institutions is not expecting the crowdfunding offering to be used a lot.
Libes disagrees. He said he think there will be a lot of entrepreneurs who will want to use the new funding mechanism the day it is available.
“There are hundreds of tech entrepreneurs in this city who think they have the best idea ever, who are going to sleep every night saying, ‘I have no idea why no one is funding me,’ ” Libes said. “Here is an opportunity for them to go and raise a couple hundred thousand dollars.”
But crowdfunding is not as easy as it sounds, as Laura Humpf found out earlier this year when she launched an Indiegogo project to raise $20,000 for expanding her Rainier Valley yoga business.
“It basically becomes a full-time job,” said Humpf, who raised only $4,203.
Crowdfunding took a lot more time and a lot more money than she thought it would. She bought online ads and made postcards to promote her Indiegogo, but said all but one of her 50 donors were people she already knew.
If she were to do it again, Humpf said she would try to build a bigger network of potential donors before asking for money.
Kickstarter and Indiegogo do not do equity crowdfunding, and will not be used for the new state offering.
Erin Nelson, co-director of the Seattle Good Business Network, an organization to connect and promote local small businesses, thinks some people are forgetting that raising money is hard.
Since Kickstarter started in 2009, just under half the 4,486 projects started in Washington state were successful, according to numbers provided by the website.
“It sounds magical,” Nelson said, “but it is a whole lot of hard work to raise money from the crowd.”
Brandon Brown: 206-464-2164 or email@example.com