Advocates say crowdfunding may one day transform how early-stage companies raise capital. But while there's plenty of enthusiasm, it hasn't translated into activity — and just how far off “one day” might be is anyone's guess.
Either way, it's a development the life science industry — home to many early-stage companies starving for capital — is closely watching.
Equity crowdfunding essentially enables early-stage companies to raise capital from large pools of small investors, via avenues like the Internet or social media, under fewer restrictions than established public companies. Advocates say crowdfunding provides a simpler, more democratic way of raising capital with fewer middlemen.
"Crowdfunding is going to be the biggest revolution, in terms of companies raising capital, that has ever happened," said Mark Roderick, a lawyer at FlasterGreenberg, a Cherry Hill firm that specializes in crowdfunding advice. "Eventually, when the gate is open, there is going to be a flood of demand.
Jeffrey Feldman, a founder of Poliwogg, a Manhattan-based broker dealer that connects early-stage companies to accredited investors, also is bold.
"In short, it's a revolution," he said.
But the idea has yet to take off. Investors and businesses are waiting for direction from federal regulators, who have yet to enact rules governing the process. Congress last year approved legislation endorsing the general concept.
Debbie Hart, president of Bio NJ, a New Jersey trade group advocating for the biotech sector, is cautiously hopeful crowdfunding can be an effective capital-generating vehicle for her industry. But more clarity from regulators is needed, she said.
"Provided that the regulations and the subsequent vehicles are crafted in such a way that make sense, are accessible and include the proper protections without high hurdles, any life science company has the potential to tap this innovative new funding mechanism," Hart said in an e-mail.
Life science industry executives are taking a wait-and-see approach so far. Scott Siegel, chief operating officer for Ezose Sciences Inc., in the Pine Brook section of Shrewsbury, said it could add another option, though he doesn't expect crowdfunding will be robust enough to pay for costly clinical research.
Still, life science companies are constantly looking for alternative funding tools, given the scarcity of venture capital funds, he said.
"It sounds like an interesting alternative," Siegel said. "We are going to have to find creative ways to raise capital."
The framework for crowdfunding was authorized last year when Congress passed the JOBS Act — short for Jumpstart Our Business Startups. The law eases securities regulations to encourage development of new and small businesses, including through vehicles like crowdfunding.
But the Securities and Exchange Commission is still writing rules regarding the implementation of the JOBS Act, which was opposed by consumer groups that said the law provides too few protections and leaves small investors vulnerable to fraud. The final legislation placed caps on how much each investor can contribute to crowdfunding vehicles.
SEC Commissioner Mary Jo White testified to Congress this year that enacting rules on crowdfunding are a priority, but the agency hasn't given a timeframe. In the meantime, advocates continue to tout the possibilities of such vehicles.
Feldman said crowdfunding is popular on the West Coast because of its potential to benefit technology startups. On the other coast, he said, it can be especially beneficial to biotechnology, pharmaceutical and related technology businesses.
Many such companies are experimenting with potentially innovative but costly therapies — it can exceed $1 billion to get a drug to market — that need investor support to flourish, he said.
"New Jersey is a hotbed of biotech investment, and has the potential to be in the 21st century to biotech what Silicon Valley was to technology in the 20th century," he said.
Crowdfunding observers say the idea appeals because it is more democratic than conventional investment vehicles that rely on middlemen. A key provision of the JOBS Act is that it allows companies to raise money through Internet portals.
Greg Lastowka, a Rutgers-Camden professor specializing in intellectual property and Internet law, said the Internet tends to cut out intermediaries, and can effectively assemble virtual communities.
"So just like Amazon shrunk the market for retail book stores, and online hotel and plane reservations undermined travel agents, now crowdfunding sites are 'disintermediating' the process of raising capital," Lastowka said in an e-mail.
And people like the idea of participating in a project, Roderick said.
"With the Internet in general, people like the idea of being part of a community. If you could combine the sense of community with money-making opportunities, it provides a unique opportunity."
But such opportunities remain more hope than reality, and David Sorin, an East Brunswick attorney who counsels startup life science and tech companies, is among those more cautious about crowdfunding's potential.
Sorin suspects the SEC is moving slowly because the public still vividly recalls the market collapse of the late 2000s — a crash many critics said was worsened by lax regulations and enforcement.
"This is not like too big-to-fail all over again," Sorin said. "Here, you're talking about who is an appropriate investor in an early-stage company and how much money can appropriately be put at risk. Is it appropriate for small and unsophisticated investors?"
Sorin expects the agency to eventually approve crowdfunding methods, though "it will be more limited than the supporters of crowdfunding would like ... I don't think anyone should overstate the amount of additional capital that will be available once crowdfunding gets started."
Steve Burrill, CEO of Burrill & Co., a San Francisco venture capital business that invests in life science companies, said crowdfunding will attract certain investors who are passionate about a cause, especially if their families have been affected by a particular disease.
But Burrill also said it's not a cure-all.
"You have a lot of people that, because their Aunt Martha died, will say, 'We want to do something,' " said Burrill, also a member of BioNJ's diagnostics and personalized medicine committee. "It will become important part of funding, but it's not ready for prime time."
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