Posted by: Contributing columnist, CLARION LEDGER FEATURE, BUSINESS, September 16, 2015:
I wrote a few weeks ago about crowd sourcing and all the ways people and companies can go to the Internet to get various services done. By far the fastest growing type of crowd sourcing is crowd funding — the process of raising money from many people through the Internet. The really exciting news is that the most elusive type of crowdfunding – equity (investor) crowdfunding – is coming to Mississippi and is almost here.
While the basic process of crowd funding is the same in nearly every situation — someone asks people to provide money to fund a particular project or activity — the specifics of what the person receives in return are what defines the differences. The Securities and Exchange Commission regulates “securities” — investments and loans — but the SEC does not regulate donations, online sales, “rewards” or other situations where the person providing the money doesn’t get ownership and isn’t making an investment. This difference in how various crowd funding is regulated has completely driven the landscape of crowd funding as it has developed.
Today, the biggest of the crowd funding sites, Kickstarter, is a donation and rewards site. Depending on how the deal is set up, people can prepurchase an item, get a T-shirt or other rewards for a donation or a sale/donation combination, but no investments in the companies can be made. On the surface, the idea that no investments are possible might sound like a problem, but Kickstarter and similar sites like IndieGoGo and GoFundMe have been immensely popular for everything from preselling products to funding overseas honeymoons for newlyweds. There are more than 20 projects that have raised more than $5 million, and the largest project has raised over $80 million.
While these rewards-based sites are not regulated and have seen rapid growth, equity investing crowd funding — where companies get investors online — has still been stalled despite a lot of hype. Congress passed the “Jobs Act” in 2012 that contained enabling language for equity investing, but the SEC has not yet put in place the required rules to actually implement the law. As a result, broad crowd funding for investors through the Internet is still illegal.
In the midst of this inaction at the federal level, several states have tried to step in with their own rules. Generally states are free to do so, but states are limited to creating rules for “intrastate”, or “within the state” offerings. These offerings require the company and the investor to both be in the same state. Any investment offered for sale outside of the company’s home state falls under every state’s rules and under the SEC’s regulations.
Fortunately for Mississippi, Secretary of State Delbert Hosemann, whose office regulates securities in Mississippi, has been very forward thinking on this issue and pushed to put crowd funding rules in place. More importantly, Secretary Hosemann sought advice from a very wide group of entrepreneurs, investors, bankers and attorneys through a working group that gave input. The big breakthrough was that the secretary of state’s office was able to implement rules without requiring new legislation — simply by rulemaking from his office.
While the enabling rules are very important, it’s critical to realize that this is only the first step. Not only do you need the rules in place, you need investors, companies and first you need someone to develop an Internet portal that follows the rules. The portal is the marketplace for the deals, but they also take on a lot of risk and development of compliant portal is expensive. At Innovate Mississippi, we became so concerned that no one might step up to develop a portal that we actually considered doing one ourselves.
As is often the case, though, entrepreneurs will step in to fill a market need and this summer we met Mississippi entrepreneur, Jennifer Gatewood who was developing Front Gate Equity. It was clear from the beginning that Jennifer was serious, and she is now beta testing the state’s only approved intrastate offering portal. Her website will soon go live with real deals, and Mississippi small businesses will be able to get investors online, although only from Mississippi investors.
I really feel that crowdfunding is the perfect tool for many deals that would otherwise struggle to get in front of investors. I’m proud of what Innovate Mississippi does to get companies raising $250,000 to $500,000 funded, and we facilitated more than $2.4 million in investments last year. What we can’t do very efficiently, though, is get $30,000 or $50,000 to 10 to 15 budding entrepreneurs who would forgo their out-of-state engineering jobs if they could start their own business.
I’m looking forward to writing articles in the next weeks about the official launch — including real companies — and I’m looking forward to writing articles over the next few years about how this has changed the picture for early stage startups in Mississippi.
Tony Jeff is the president and CEO of Innovate Mississippi. He can be reached at tjeff@innovate.ms.