Below are excerpts from Zan Nicolli’s participation in the
roundtable.
Q: What does today’s
market mean by crowdfunding?
A. Under the JOBS
Act and proposed regulations there is not a specific definition, which is
interesting given the 600 pages of regulation. But, a rough definition is exactly
what it sounds like, that is, it concerns investing by a crowd or group of
interested investors from the general public, which could include anyone
presented with an opportunity to invest in a private business venture. On a
Federal level, it’s through the Internet. It’s an investment opportunity with
an expectation of getting the profit back from others, which brings
crowdfunding under all of the complex securities laws.
Q: What kinds of
investors are drawn to the idea of crowdfunding?
A. The
crowdfunding exemption was intended to give the general public the opportunity
to invest in startups, but in protected amounts of investments, so they aren’t
at risk of losing their entire net worth. Also, of course, it was intended to make
capital raising easier for startups and small companies. Whether we’ll have a crowd
that’s interested in getting together to invest in a particular business or
patent really is unclear. It will be most effective for community investment.
Those who aren’t necessarily wealthy can know a local business that’s starting
and take a chance by making an investment. Various states that enacted their
own crowdfunding laws are recognizing that. Those laws are completely dependent
upon the companies and investors being from that particular state.
Q: What does this
money seem like to businesses? For whom does it work? For whom does it not
work?
A. There are
opportunities and risks for company owners. Companies have to think long and
hard about whom the investors are and how many they’re bringing in. Shareholder
relations can be a costly thing that a small company may not anticipate. If
there are too many shareholders, you start getting into potentially becoming a
public company. An additional risk is secondary trading of crowdfund shares.
Private placements, mostly with a handful of accredited investors, they become
a limited partner with operating agreement provisions that gives them an exit
strategy. Here an exit strategy isn’t clear for the average everyday investor. The
Federal act requires an investor to hold shares for one year. Regulations are
being developed on whom you can transfer to. Shareholder relations is certainly
a risk for a company using the crowdfunding route.
Q: What’s the ideal
outcome?
A. The
Crowdfunding Act is very interesting because securities laws started in 1933
after the Great Depression. After that time, there have been about a dozen
significant securities laws, all designed to protect investors and prevent
fraud. There has been little focus on raising capital and benefitting companies
and startups until the JOBS Act. This is the first law that wants to ease
regulatory burdens. The ideal outcome will be to strike the perfect balance
between easing burdens/costs for startups and small private companies and
protecting investors so they don’t lose their life savings, and make sure there
aren’t bad actors out there taking advantage of the public. It will take time
to reach a happy medium in practice, but I don’t think crowdfunding is going
away.
