Crowdfunding will jump-start how early-stage companies raise capital, though the degree of that transformation is tinged with uncertainty as both investors and regulators explore uncharted waters, an expert panel told gatherers today at Montclair State University.
The federal JOBS Act, or Jumpstart Our Business Startups, was passed in 2012 in order to ease the ability of small, private companies to raise capital through online vehicles.
"Instead of companies pitching to five potential shareholders, we now have the potential to pitch to hundreds and thousands of investors," said Daryl Bryant, founder and CEO of StartupValley, which was formed to help businesses raise capital. "This is a game changer."
One key provision, which lifts an 80-year-old ban on using public advertising to solicit investors, takes effect Monday. Attorney Douglas Ellenoff said he expects to see a lot of activity on Twitter next week.
The JOBS Act legislation, developed after the financial crash of the late 2000s — a period in which depressed capital markets offered little hope for early-stage companies — has attracted critics concerned that easing of regulations will encourage fraud.
Broadly speaking, panelists acknowledged the risk of losing money, but said online vehicles will actually enable greater scrutiny.
"It is incredibly difficult to fraud somebody when everything you're doing is transparent," said Jonathan Sandlund, founder of CrowdCafe.com.
Sandlund added that confidence in public markets has declined, making private alternatives more attractive. Other panelists echoed that sentiment.
"No one on this panel is shying away from the reality that people will lose money," said Ellenoff, a member of Manhattan firm Ellenoff, Grossman & Schole LLP. "That's what investment is. Are we going to shut down public markets because of MF Global? I don't buy that. There is a contained risk."
The first set of changes, known as Title II of the JOBS Act, allows private companies to solicit investors through vehicles like social media or newspapers. Such solicitation previously was banned under an 80-year old rule enforced by the Securities and Exchange Commission.
The law says funding can only be accepted from accredited investors. Accredited is defined as those with $1 million or net worth or incomes above a certain level — $200,000 for individuals and $300,000 for married couples.
The second major provision of the JOBS Act allows nonpublic companies to raise $1 million over a 12-month period through the Internet. In this category — known as Title III — companies can seek money from accredited or nonaccredited investors, though caps on individual contributions apply.
However, the SEC is still writing rules regarding this provision. Ellenoff said he doesn't expect that to happen until next year.
The online platforms also will have to pass muster from the Financial Industry Regulatory Authority and the SEC.
The event, organized by the school's Feliciano Center for Entrepreneurship, attracted about 150 gatherers, including many business owners. Some were skeptical, others curious.
Andrew Hines, CEO of Starship Enterprises, is developing technology on products like convertible chairs that help people with physical infirmities navigate their home. He said he is applying for federal grants, but that is time consuming.
"Crowdfunding is appealing to me," Hines said. "And yet so many people haven't heard of it. I had to educate myself."