U.S. paves way for Kickstarter-style investing

Proposed rules would help pair small businesses with backers.

zkyle@idahostatesman.comJanuary 15, 2014 

Joshua Riley, president of Ruckus Fermentation, used a crowdfunding campaign to raise money to develop the Bootlegger Bottle, which ferments fruit juice and sugar into alcoholic drinks.

KATHERINE JONES — kjones@idahostatesman.com

  • Kickstarter.com is the largest of dozens of crowdfunding websites. Since its launch in 2009, Kickstarter has generated more than $930 million in donations for projects and businesses, according to its website. Kickstarter says it has successfully funded 54,326 projects while failing to meet campaign goals for 69,959 others. More than 5.4 million Kickstarter backers have made about 12.8 million pledges.

Soon, crowdfunding sites such as Kickstarter could provide opportunities for investors, just as they already do for entrepreneurs.

Thus far, Kickstarter, IndieGoGo, FundAnything and dozens of similar sites have served as platforms for entrepreneurs and artists to accept donations — but not investments — to fund projects. Donors often receive products, shirts, mugs and other perks, but cannot buy shares in a venture or receive a return on their money.

New rules might change that. The U.S. Securities and Exchange Commission has proposed to let people invest in ventures through websites in the same way that donors give money today.

The change would create a new route for startups to raise capital, says Joshua Riley, a Nampa entrepreneur. Riley already is using Kickstarter to solicit donations for his Bootlegger Bottle, a product that ferments fruit juice and sugar into alcoholic beverages overnight. He raised $27,704 from 336 backers, meeting his $25,000 goal.

“This throws a new twist in what it’s like to be a startup,” Riley says.

Under the proposal:

• A company could raise a maximum of $1 million during a 12-month offering.

• Investors with annual incomes or net worths of less than $100,000 could invest up to either $2,000 or 5 percent of their annual income or net worth, whichever is greater.

• Investors with annual incomes or net worths exceeding $100,000 could invest 10 percent of income or net worth.

• Only U.S. companies could use the offering system.

• Websites would be licensed and monitored by the SEC.

The proposed rules also include disclosure requirements, including:

• The names of officers, directors and shareholders owning 20 percent or more of the company.

• A description of the business and the use of proceeds from the offering.

• A description of the financial condition of the company provided by the company.

• In some cases, financial statements including third-party audits.

Most of the 160 comments posted on the SEC website as of Dec. 31 supported adopting the proposed rules.

Louise Luster, executive producer at CTP Films LLC in Eagle, said she was in favor of the proposal with one major exception: The rule that requires businesses to return money to investors if the campaign goal isn’t reached. If she raised only $9,000 of a $10,000 goal to fund legal fees for a documentary, she’d wind up empty-handed.

Developing and promoting crowdfunding campaigns takes time, said Luster, who scrapped a donation-based campaign for a film project several years ago. She said she would consider using a professional service to manage any future campaigns.

Though investment campaigns created by the proposal would be cumbersome because of the registration and reporting requirements, Luster says more avenues to raise money can only be a good thing for Idaho artists and businesses, which have fewer fundraising opportunities than big-city peers.

“Living here, where it’s isolated, it’s going to be a great year coming up with a lot of people finally being able to pitch their project and getting funding,” she told Business Insider.

The proposed SEC rules would create a platform similar to a system already in place in Idaho, the Small Company Offering Registration program, or SCOR.

Collin Rudeen used SCOR to raise $350,000 from 170 investors to help him open Bogus Brewing Co. in Boise.

Rudeen says a national crowdfunding website could reach a broader investor pool and offer easier transactions than SCOR. But for Rudeen, that’s where the appeal ends because SCOR has fewer requirements for owner disclosure and investor qualification than the SEC proposes.

“Honestly, it seems like all of the things these new rules offer are already available in SCOR, with the exception of (providing) a platform for information and exchanging money,” Rudeen says.

Riley, the Bootlegger Bottle entrepreneur, says using either SCOR or a federal crowdfunding website could be a problem for a business aspiring to become a multimillion-dollar operation.

Riley’s company, Ruckus Fermentation, hasn’t brought in a dollar of revenue yet. But if his fermentation technology works and if the Bootlegger Bottle catches on, he says the concepts could be sold to large beer, wine and liquor producers.

If his company grows into a multimillion-dollar operation, Riley doesn’t want to share profits with a group of small-time investors from a crowdfunding campaign during the company’s infancy. Securing a future $4 million loan to expand manufacturing or distribution would be complicated if he were beholden to investors from a small crowdfunding offering.

“If you are just looking for a one-and-done round of funding, a portal might be beneficial,” Riley says. “But it could really tie your hands from getting to larger forms of funding later.”

The SEC is accepting public comments on the proposed rules until Feb. 3.

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Zach Kyle: 377-6464@IDS_zachkyle

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