Crowdfunding: the process of raising money to help turn promising ideas into business realities by connecting investees with potential supporters. Often using the Internet to reach possible investors, the process involves offering goods, such as a key chain or t-shirt, in exchange for a contribution to help a business get started. This process gives entrepreneurs a chance to test the marketability of their venture. They can set a deadline for reaching a fundraising goal. Some make, even exceed, their goals, others don’t. They can gauge the potential for a successful start-up of the business based on the public’s response to the request for support.
But crowdfunding is about to go to a whole new level.
“The current model is effective for the right projects,“ says Mark Hagar, a primary partner of First Break Funding LLC. “But the landscape is changing.”
Hagar says that as a result of the April 2012 JOBS Act, entrepreneurs can soon crowdfund their businesses using equities rather than goods in exchange for money.
“As long as certain criteria are met, companies that sell securities via crowdfunding can be granted a registration exemption by the Securities and Exchange Commission (SEC),” Hagar says. “Furthermore, the law increases the number of shareholders a company is allowed before being forced to go public.”
Being able to sell shares of their company without going through the expensive, time-consuming process of registering with the SEC is good news for entrepreneurs.
“Soon, small businesses will more easily be able to raise money from large pools of small investors. We’ve got the law, but we don’t yet have the means to crowdfund through equities,” Hagar says, noting that the SEC has not yet written the rules governing equity crowdfunding.
First Break Funding, an online company being established by primary partners Hagar, David Heltzel and others, is a forum for entrepreneurs and investors to connect with each other. After the SEC writes the rules, the firm will apply to be a funding portal, a term created by the JOBS Act. When approved, First Break Funding will provide a structure for the funding process and give visibility to entrepreneurs as well as investors. Essentially, the firm will be a registered brokerage through which the crowdfunding offering is conducted. The JOBS Act stipulates that a new business can qualify for a registration exemption from the SEC only if it uses a funding portal to offer equities.
“The funding portal will be used by start-ups and companies that are transitioning and growing, in other words, businesses that lack the equity they need before they can go to financial institutions for funding,” says Heltzel.
Before launching the equities funding portal, the partners will need approval by both the SEC and the Financial Industry Regulatory Authority (FINRA), the largest independent securities regulator in the United States. Hagar says it’s possible that FINRA will have to create a new license for funding portals.
Last month, the first annual Crowdfunding Professional Association (CfPA) Convention and Bootcamp drew entrepreneurs, Internet platforms and crowd investors seeking to learn more about the impact of the new legislation on business, the financial community and the economy. Actively participating in this newly-formed professional organization gives Hagar and Heltzel the advantage of staying abreast of the legal aspects and rapidly changing dynamics of crowdfunding.
First Break Funding will have a regional focus.
“We have a good investment community in Fort Wayne,” says Hagar. “But there hasn’t been a real way to connect.”
The partners hope that First Break Funding, serving as an intermediary, will provide a much-needed forum for counterparts in the area to find each other.
“Equities crowdfunding is a good way for a local chef to raise money to open his or her own business,” says Heltzel, excited about opportunities that will soon be available to talented people with limited resources and to investors who want to keep that talent in the community.
The partners anticipate a detailed application process, one that might deter some companies from pursuing an equities crowdfunding license. Besides added opportunities for business growth that the legislation provides, Hagar is glad to see substantial legal and educational oversight of crowdfunding.
“There has been virtually no oversight until now,” he says.
When the SEC writes the rules, (which is slated for the end of 2012) Hagar and Heltzel will be ready to do business as a funding portal, helping the local economy grow by connecting entrepreneurs to investors.