News Column

Smaller investors can now own equity in Hoosier firms through online crowd funding

July 3, 2014

By Barb Berggoetz, The Indianapolis Star

July 03--Hoosiers who don't have a fistful of cash now have a unique option to become equity investors in Indiana businesses.

The Secretary of State's office has developed new rules that allow individuals to use crowd funding to invest up to $5,000 at a time in privately-owned businesses. It also permits Hoosier entrepreneurs to use the increasingly popular online fundraising strategy to raise up to $2 million to start or grow a privately-owned business.

State lawmakers this year passed legislation on crowd funding that went into effect Tuesday and led to this opportunity for small investors to support homegrown firms.

"It is intended to be one more tool to help Indiana companies get off the ground and stay productive," said Secretary of State Connie Lawson this week. "This new market will change the way Indiana entrepreneurs and investors connect."

Traditional crowd funding began as an online fundraising strategy to allow the public to donate small amounts of money. More typically, the money is donated through social networking websites to help artists, musicians, filmmakers and others.

But under the new law, business can use crowd funding to attract investors.

"It's going to be really important for a lot of small businesses throughout Indiana to be able to raise funds this way," said Jason Whitney, executive director of the Innovation Center, a business incubator in Richmond. "I'm really proud of the state of Indiana for taking this step forward and being one of the first states to offer this for our entrepreneurs."

PETE THE PLANNER: How much risk can you stomach?

Two other states, Michigan and Wisconsin, started crowd funding online investment programs this summer, said Lawson. Georgia and Kansas have similar investment opportunities, but not online.

Nationally, Congress passed in April 2012 the JOBS Act, which instructed the Securities Exchange Commission to draft rules to implement crowd funding. But rules haven't been created yet.

In Indiana, the online crowd funding can be used in conjunction with more traditional financing options, according to Lawson. But with more, smaller investors, crowd funding may allow entrepreneurs to better stay in control of the vision and direction of their businesses, she said.

Previously, she said the only people who could invest in private business offerings were "accredited investors" -- those with $1 million net worth or an individual income of $200,000 or joint income of $300,000. During the Great Depression, the federal government banned private companies from soliciting investments from the general public to limit fraud.

But Lawson, speaking at The Speak Easy, a Northside site for entrepreneurs, startups and supporters to work and collaborate, said so much more transparency and disclosure exists now because of the Internet, so this restriction on small investors is no longer needed.

Still, investors who use this vehicle need to be wary.

"Hoosiers need to be aware of the risks before they invest, and they should always do their research before investing," said state Securities Commissioner Carol Mihalik, who helped developed the rules with staff and the advice of local businesses.

Rules under the new law help limit the risk. Businesses who want to participate have to register with the Secretary of State's office, submit their offerings and financial information and the names of their escrow agent and Internet hosts. If companies don't want to submit their financial data, they can only raise $1 million through crowd funding.

Investors visit the Internet host sites to find and learn about companies in which they want to invest. Funds anyone invests will be directed to an escrow account until the business has raised the amount of funds it committed to raise in a period of time it chooses.

If all the money is raised in that time period, the funds are invested in the company. If not, investors get their money back.

Brandon Smith, a founder of Localstake, a crowd funding platform in Indianapolis, jumped at the opportunity and signed up Wednesday to be an Internet host to recruit companies, help them find investors and facilitate the funding process.

"We have a variety of clients who are looking at using the new law and we're expecting to have the first client use it in the next few weeks," said Smith.

Lawson doesn't expect a great influx of businesses using this method at first, but she expects it will catch on as more businesses realize its benefits. Lawson said the crowd funding could be helpful to businesses such as restaurants, breweries, organic farms, tech firms and other startups.

But it also might be a bit of a hassle.

Jim Brown, founder of PorchLight, an app to help people manage home improvement projects, is being cautious and taking a wait-and-see approach. His app, now being tested in about 50 homes in Hamilton County, gives homeowners information on upkeep, maintenance, lawn care and when and how the work needs to be done.

"If you try to raise $2 million, $5,000 at a time, that's a lot of people to have to manage and send reports to and keep up to date," he said. "That's a bit of a challenge."

The crowd funding looks helpful, Brown said, but it actually may be harder to raise money this way than from the traditional type of accredited investors. He also said the $5,000 limit is too low and could be higher, like the $10,000 limit in Michigan.

Whitney agrees that limit is somewhat low if a business is trying to raise $1 million or more from smaller investors.

"But from what we see in Richmond, there is a higher number of people who are really looking for that smaller amount of money," he said. "So, it should have a greater impact for those smaller companies to be able to stay open or grow and hire more people into the workforce."

He believes several startups that are tenants in his Innovation Center may take advantage of this opportunity to raise smaller amounts of money.

"This would give me an opportunity to invest in other businesses, too," said Whitney.

Since the Midwest, in general, is a fiscally conservative area, he expects getting people enthusiastic about investing in opportunities with greater risk may take some time.

"But once people see how it's going to affect their community," he said, "they might be more willing to invest."

For more information and to view the rules, entrepreneurs and investors can view Lawson's website, www.in.gov/sos/investinindiana, or call the Securities Division, (317) 232-6681.

INDYSTAR: Business news

Call Star reporter Barb Berggoetz at (317) 444-6294. Follow her on Twitter: @barbberg.

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(c)2014 The Indianapolis Star

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Source: Indianapolis Star (IN)


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