Business Success Strategies: Equity Crowdfunding to Enter a New Phase for Main Street and Startups

By SBE Council at 22 April, 2016, 9:26 pm

Sherwood “Woodie” Neiss (left) chats with U.S. Ambassador Philip Goldberg following his presentation in Manila, Phillipines. Neiss travels across the globe, working with business leaders and government officials on initiatives to strengthen the ecosystem for entrepreneurship, including capital access through crowdfunding.

Q&A with Sherwood Neiss

Entrepreneur, Crowdfunding Expert & Advocate

On May 16, equity crowdfunding enters a new phase. Title III of the Jumpstart Our Businesses Startup Act (JOBS Act) takes effect. It took four long years following President Obama’s signing of the JOBS Act, but now that Title III is fully implemented, ordinary people can invest in startups and small businesses through regulated online platforms. These new investors will join accredited investors and have the opportunity to size up the viability and potential of entrepreneurial businesses, discuss these opportunities with “the crowd,” vet pitches from entrepreneurs, and perhaps invest in the startups or small businesses they deem worthy of financial support.

SBE Council member Sherwood “Woodie” Neiss, an award-winning entrepreneur and founder of Crowdfund Capital Advisors, developed the framework and worked tirelessly for legislation that now allows debt and equity crowdfunding. SBE Council president & CEO Karen Kerrigan advocated alongside Neiss and fellow members Jason Best and Zak Cassady-Dorion. They were all present at the White House for the signing of the JOBS Act on April 5, 2012.

In this edition of Business Success Strategies Q&A, Kerrigan interviews Neiss about the growth and maturation of the crowdfunding market and ecosystem, its prospects for the future, his work across the globe, and what else needs to be done to improve capital access and formation in the United States.

KERRIGAN:  It’s been four years since the JOBS Act was signed into law and the long-awaited Title III of the act will finally “go live” on May 16. How important is Title III of the law, which allows ordinary people to invest in small businesses and startups?

NEISS:  For Main Street businesses, as well as their customers, this represents a fundamental shift and opportunity. No longer will these businesses have to beg banks or VCs (if they can find them) for money but now they can go to their customers, friends and family and ask them to borrow money or invest in their business. This was essentially illegal for the last 80 years, but as of May 16^th the most promising community businesses can crowdfund their operations. I believe when this kicks off over 30,000 businesses will raise in excess over $400M in the first year. This is money that they did not have access to before but will help them grow, hire Americans, and spur local economies.

KERRIGAN:  The naysayers who believe investment crowdfunding – or Regulation Crowdfunding as you call it – will generate widespread fraud continue to sound the alarm about online investing. Is there anything we can learn from gift and donation-based crowdfunding, or even accredited investor (Title II) crowdfunding that challenges their belief?

NEISS:  There are a few things. First, take heart. There is no objective evidence that just because this new form of fund raising is here that investors will be rushing in to risk all their savings. Not only does that defy logic, but there is too much media out there warning people about scams, pyramid schemes and the like for investors to believe that this is a “new, get rich quick” opportunity.

Drilling down in donation and rewards based crowdfunding we are seeing that lots of people are donating small amounts of money – NOT a few individuals deploying a large amount of capital. This is mainly because people are limited in the amount of money they can deploy at any given time. This is understandable when you consider people need money for food, rent, gas, utilities and savings. When it comes to crowdfunding, people need to carve out what cash they have available to them to put into people with creative ideas or to pre-order a product and usually this allocation is small.

We’ve also learned from accredited-based crowdfunding that even for the “rich” there seems to be a cap at the amount they are willing to risk. We see this to be around $25,000 per investment. In both donation/rewards and accredited investor crowdfunding there has been no systemic fraud. It is hard to pull the wool over thousands of discerning eyes online — A few bad comments about your crowdfunding campaign and the walls usually come crumbling down before anyone loses any money. It is much easier to commit fraud behind closed doors than online in front of thousands of people, where we know who you are and where you live, and where everything you say is recorded and can (and will) come back to haunt you.

KERRIGAN:  How has the market developed since the JOBS Act was signed more than four years ago? Even without Title III, is the JOBS Act doing what it was intended to do – that is, provide capital access to entrepreneurs and encourage capital formation?

NEISS:  Look at how Title II of the JOBS Act performed in year one. According to Crowdnetic, there were 4,712 offerings that had received capital commitments of $385.8 million through the end of the first year of Title II vs 6,063 offerings and $870 million in capital in year two. This represents an approximate growth of 28.7% in the number of offerings and 125.5% in the amount of recorded capital commitments. This will be well over $1 billion this year. I think that represent a significant achievement thanks to the JOBS Act.

However, when we consider the opportunity with Title III, I find it hard to believe that only 7 companies a month in all 50 states will do a Title III offering (4,712 Title II offerings from above divided by 50 states divided by 12 months) in year one. It will most likely be a magnitude of that. We originally created a market sizing analysis that was published in conjunction with UC Berkeley back in 2012. After reviewing the report just now, I still believe the estimates to hold true and are conservative. This market will be no less than $400 million when it kicks off in year one with the potential to be as high as $1 billion.

If you look at the report you will see these are the middle targets for the numbers we projected. The reason I believe the middle number is reasonable to go with over the lower is because we now have the history and experience of Title II to use as a baseline. Title II leverages the same technology but only targets accredited investors. Title III will have a broader application than Title II and fill a greater market demand serving both Main Street businesses that don’t qualify for Angel, VC or Title II capital as well as Main Street investors that don’t have the deep pockets of Angels, VCs or accredited investors but collectively have an investing power much greater than Angels, VCs or Accredited investors only.

KERRIGAN:  We’ve heard, and SBE Council has expressed concerns, that small businesses face some regulatory hurdles and compliance costs that could undermine the potential and purpose of equity crowdfunding. What are your thoughts on this?

NEISS:  Clearly you don’t want to get in trouble with the Securities and Exchange Commission (SEC). The law and the Rules for Regulation Crowdfunding have many deadlines, compliance filings, due dates, etc. All of this comes with time and money. The best way in which you can make sure that you stay on top of things and streamline your compliance is to use technology tools that have been developed to assist you in your fundraising. This includes business plan products like LivePlan, debt and equity crowdfunding platforms that are registered with the SEC and FINRA (and will make sure you have the right documents, disclosures and file forms on your behalf), as well and post funding compliance tools (that will keep you on schedule with the SEC, your investors and the IRS). Don’t try and do all this on your own. Leverage the tools that are out there to help you succeed. Doing so will reduce your compliance costs and keep you from undermining the potential and purpose of equity crowdfunding.

KERRIGAN:  On May 16, your firm – Crowdfund Capital Advisors – and SBE Council are hosting a “Demo Day” on Capitol Hill. What will congressional staff, regulators, White House and SEC officials (among others) learn when they visit our Demo Day on Capitol Hill?

NEISS:  Attendees will learn this is a very sophisticated, technology-driven marketplace. When Obama signed the JOBS Act into law in 2012 there was a lot of questions about “what” crowdfunding is. Over the past 3 years, cutting edge financial technology companies have come into the market (usually founded by very experienced traditional financial market players that have broken off to build a new tech companies) to support this new marketplace. Attendees will have a change to see how these technologies help companies all the way from business planning, to legal disclosures, to matching investor to deals, to social media marketing, to research reports on underlying companies, to valuation reports, to accounting tools, to investor relations, to compliance tools post funding and more.

KERRIGAN:  You have traveled around the world and consulted with governments, business leaders, entrepreneurs and policy officials about establishing regulatory frameworks in the countries to support equity crowdfunding. How is this going? Are countries moving ahead of the U.S. in terms of supporting the ecosystem that is necessary to enable a healthy crowdfunding market?

NEISS:  It has been such an honor to travel around the world on behalf of the World Bank, Inter-American Development Bank, U.S. State Department, governments and NGOs globally to help explain what debt and equity crowdfunding is and what policy makers and stake holders need to do to develop a balanced approach to regulating crowdfunding. Governments understand that businesses create jobs. Smart governments understand that policy can either enable or inhibit business start and growth. The governments and multi-lateral organizations that wish to promote job create have been the ones to really jump on board with us.

I think the countries that take the UK approach to crowdfunding (meaning the government hasn’t created heavy regulation or policy to oversee the industry and they rely heavily on the data coming out of crowdfunding to guide their responses) have been the ones to see crowdfunding advance the fastest. In addition, the UK has become incredibly innovative in how they are supporting the ecosystem. First, they have offered tax incentives to investors to encourage them to invest in and hold their investments in these crowdfunded companies. If investors do this, when there is an exit, the investors will not be taxed on the capital gains. That is a HUGE incentive to get investors into the market. Second, the government has created programs to encourage investors into get in by coming up with “top off funds” that invest the last 20% or 30% of a campaign if the crowd comes in with the first 70% or 80%. We need to have similar types of programs here that investors know are there for the long-haul and won’t change with a change in administration.

KERRIGAN:  What needs to be done legislatively or from a regulatory perspective to strengthen and improve equity crowdfunding?

NEISS:  Ideally we need to see how Title III starts off to understand if it is living up to its potential. We need to interview companies along the way to understand what bottlenecks they face and why? Was the $1 million cap too low for them? Were the compliance filing forms and dates too onerous for them? Are there parts in the law (audits) that are irrelevant for a small company that is by nature more transparent than a large corporation and hence a wasted expense? Are there better ways of pooling capital (ie: funds) that aren’t allowed under the law but if were could allow investor to diversify into many equity crowdfund offerings and reduce their risk. If yes to any of these, we need to revisit and readjust the regulation.

KERRIGAN:  Can I ask you to reflect on your experience in advocating for equity crowdfunding, the success you had and why entrepreneurs should engage with Congress, the White House and federal agency staff to help change policies?

NEISS:  As much as America might dislike the way Washington operates, unless Americans get involved things won’t change. This requires that instead of complaining about a problem, Americans show up with a solution. That’s what we did. We came with the framework (www.StartupExemption.org) to update the securities laws to the Internet age and advocated for debt and equity crowdfunding. We got consensus around our idea. We flew to Washington, D.C. on our own dime and walked the halls of Congress lobbying for our idea. And we testified when we were asked. That’s how we got this done.

Be it the national debt, taxation or how we are going to deal with Medicare, people need to come together at events like Startup Weekend, brainstorm SOLUTIONS to the individual parts of the problem, go to Washington and engage with Congress, the White House and federal agency staff to help change policy. And they need to use trusted partners like the Small Business and Entrepreneurship Council to help them navigate the way once they get to Washington. Be persistent, stay out of politics (make your issue an “American” issue and not a Republican or a Democrat one) and don’t give up!

KERRIGAN:  Finally, what is the best resource provided by Crowdfund Capital Advisors that will help entrepreneurs and small business owners understand what they need to do to successfully raise investment capital via crowdfunding?

NEISS:  Get our book Crowdfund Investing for Dummies on Amazon.com. Read the supplement we published about the final rules. And take our online education series, Success with Crowdfunding!

To learn more about the May 16 Crowdfunding Showcase and Celebration – Demo Day on Capitol Hill, please click here.