U.S. Sen. Kelly Ayotte is co-sponsoring a bill that would let entrepreneurs raise up to $1 million a year by selling ownership stakes in their companies through what are known as crowdfunding websites. A similar version of the bill breezed through the U.S. House early last month.Introduced by U.S. Sen. Scott Brown, R-Mass., the Senate bill addresses some of the consumer protection concerns that critics levied against the House bill, which passed overwhelmingly in November by a 407-17 vote. (Two of those "aye" votes came from New Hampshire Congressmen Frank Guinta and Charlie Bass.)While their terms differ, both versions seek to update outdated securities law to make it easier for entrepreneurs, startups and small businesses to get access to early-stage capital."At a time when technology and social networks are shaping our daily lives and driving our economy to new frontiers, the small business and startup communities are stuck with investor regulations that predate the first computer," said Brown.Under the Senate bill, entrepreneurs would be allowed to raise up to $1 million annually from an unlimited number of unaccredited investors without having to register their firm with the Securities and Exchange Commission. To qualify for that exemption, the company must raise the funds through a crowdfunding website, disclose all risks to investors, choose a primary state in which to do business and become incorporated under state law and file notices with the SEC.Just who would the investors be? Well, pretty much anybody with the money and desire to invest. Any person who wanted to throw his or her financial support behind the entrepreneur's venture -- be it his or her parents, next-door neighbor, or a total stranger -- would be allowed to buy a stake in the business without becoming an SEC-accredited investor.To help lessen the risk, individual investments would be capped at $1,000.In contrast, the House crowdfunding bill would have let entrepreneurs raise up to $2 million and would have capped individual investments at $10,000.Spurring innovationGiven its strong bipartisan support, and backing by the Obama administration, it looks likely that the bill -- or at least some version of it -- may soon become law.If it does, experts say it could be a major boon for New Hampshire entrepreneurs who are struggling to launch their businesses using traditional methods of financing.The crowdfunding exemption would be an "enormous opportunity" for average Americans to support job creation, said Tom Elliott, founder of the Idea Greenhouse, a business incubator in Durham."A lot of Americans are not expecting the political system or Wall St. to solve the jobs crisis. If there are entrepreneurs in New Hampshire or Mozambique who can figure out how to put people back to work, they're going to support it," said Elliott, adding: "Crowdfunding is the ultimate way to vote with your wallet to support entrepreneurs."A spokesperson for Sen. Jeanne Shaheen said she is "looking at this legislation" but hasn't taken a position on it yet.Jamie Coughlin, entrepreneur-in-residence at the abi Innovation Hub, a Manchester business incubator, said he was surprised by how widely the bill passed the House, given that crowdfunding is such a new method of financing."That they would be willing to embrace the unknown factor of crowdfunding is ... remarkable," he said. "What it points to is the reality that the traditional capital markets are tight and probably are going to be tight for the next several years, so in order to spur innovation, the government must allow for creative, innovative ways to access the capital."Crowdfunding could help the close the huge gap that exists in New Hampshire between entrepreneurs, their ideas and funding, said Elliott."The existing methods of getting capital for entrepreneurs in New Hampshire are not working, or at least are not working fast enough," he said. Crowdfunding "would speed that up and get people thinking about reinvesting in our own entrepreneurs."Crowdfunding has grown in popularity in recent years, as artists and entrepreneurs have increasingly turned to online platforms to finance their creative and business ventures.One of the most popular crowdfunding websites, Kickstarter.com, is rife with pitches from writers wanting to self-publish their books to musicians hoping to raise enough money for a few hours in the recording studio.'A new dimension'It's not just creative types using the sites. Entrepreneurs have used them to varying levels of success to bring their prototypes both to life and to market.Thomas Young, a Durham entrepreneur featured in the July 15-28 issue of NHBR, banked more than $60,000 in his Kickstarter run, annihilating his initial goal of $11,000. He has since leveraged his idea for modular, durable earbuds into its own business.But under current securities law -- which was established in the 1930s during the Great Depression -- aspiring ventures like Young's aren't allowed to offer equity to those pledging money. Instead, people get a reward for their pledge, be it a book, CD, or earbuds once the project is completed.This bill would change that to offer investors something more concrete."To allow people to get not a tax deduction or a good or service, but some sense of ownership in a legal sense over a startup, adds a new dimension I think is crucial," said Elliott. "Not only do they want to create jobs and the dreams of entrepreneurs, they want to get their money back someday."It was with high hopes that Elliot and others in the local entrepreneurial community have been tracking this legislation, hoping the United States will follow the lead of Great Britain, Hong Kong and the Netherlands, all of which have legalized equity-based crowdfunding.For Jen Risley, education program coordinator at the Hannah Grimes Center, a Keene incubator, what's most exciting about crowdfunding is the opportunities it would afford for people to invest locally."I know many of us would love to invest in local businesses, but we're not accredited," said Risley. "This would give us that opportunity."The potential for scammers to bilk investors is one of the biggest criticisms levied against the House bill, so the Senate bill sought to address these concerns by including further consumer protection measures.For example, under the Senate bill, crowdfunding sites would be required to conduct background checks on those making offerings, all cash management would have to be performed by a qualified third party, and it would establish a complaint process for investors, among other protections.While Elliott thinks fraud is a legitimate concern and there probably will be cases of it, "we shouldn't let that scare us -- there are people going door-to-door selling things fraudulently all the time."Plus, he pointed out, most people had similar concerns about e-commerce when it first debuted, and those fears have since been allayed.Of course, crowdfunding won't replace venture capital, angel investing or bank lending -- nor should it, stressed Elliott.Angels and VCs can offer wisdom, experience and strategy, which for entrepreneurs is often as important as capital, said Coughlin. Crowdfunding is just another tool in a fund-raising arsenal that for many these days is looking a bit barren."The reality is, that for entrepreneurs to be successful at fundraising," said Coughlin, "they have to knock on many and all doors."
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This article appears in the December 2 2011 issue of New Hampshire Business Review