Crowd-Funding Platforms Hope To Target Investors

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Crowdfunding has taken off. 

Kickstarter is the best known crowdfunding site, but there are hundreds of online platforms devoted to raising money for individuals and businesses.

The sites allow entrepreneurs, artists and others to pitch an idea for a project and collect donations to finance it. 

But the day may not be far off when crowdfunding is open not just to donors but to investors who want a return on their money.

In Vermont some crowdfunding advocates say it could bolster efforts to help small businesses and non-profits.

"Put Your Money Where Your Mouth Is" is the motto of Three Revolutions, a new Vermont based crowdfunding portal that is essentially a mini-version of Kickstarter. 

Three Revolutions puts food and farming entrepreneurs together with people willing to donate money help build them.

Still in its infancy the company has no paid staff. So far its raised $8,000 to help a handful of clients. 

Most crowdfunding donors contribute small amounts often less than $100. In return they might receive a small perk like a tee shirt or a product sample.

Co-founder Kevin Lehman says the idea for Three Revolutions grew out of his master’s degree project at Marlboro College.

Lehman says to sustain itself, Three Revolutions will have to expand its client base well beyond Vermont’s borders.  

He says the company also hopes to expand into the new field of equity crowdfunding where instead of making donations, people invest money in hopes of a return. 

"There are folks who are going to want to invest larger amounts of money and they want a return, they want to get their money back," says Lehman. "They’re doing it both because they believe in the business and what their mission is but they’re also doing it for some financial incentives."

Investor based or equity crowdfunding was authorized under the 2012 JOBS Act.

Implementation has been delayed until federal authorities, primarily the Securities and Exchange Commission, issue rules to regulate equity crowdfunding platforms and protect investors from fraud. 

In the meantime the number of crowdfunding portals continues to expand.

Launcht is a Boston company that started in Vermont. It creates software used by crowdfunding portals like Three Revolutions.  

Launcht cofounder Freeman White, a Cornwall, Vermont native, agrees that investment crowdfunding could raise a lot more money in larger increments than the donor based model. 

That could help entrepreneurs and small businesses that have a difficult time raising capital. 

White says even with the prospect of earning returns, investors who put money into equity crowdfunding will be largely motivated by the ability to invest in enterprises that share their values – whether its sustainable agriculture or supporting a locally owned business.

"The financial returns are I think the smallest part of this whole equation," he explains. "I think the likelihood of financial return make be somewhat minimal especially in the early years until we start to see some of these businesses take off and do well."

There are other reasons why investors might be drawn to equity crowdfunding.

Cairn Cross is co-founder of Fresh Tracks Capital  a small venture capital fund in Shelburne. He also teaches in the business school at the University Of Vermont. 

Cross says equity crowdfunding could be an attractive option for people who feel burned by the stock market and leery of Wall Street.   

"There’s so much going on that’s perceived to be controlled by Wall Street and the large institutional players that there’s this backlash," says Cross.

He says part of the appeal of equity crowdfunding is giving small investors a more tangible sense of how their money is being used.

"It gives the Main Street investor a way to invest locally," he explains. "It’s facilitated online but they can literally look across the street  and see that business and say, ‘this is great, I own a piece of that business and I’d much rather do that than invest in some mutual fund run by some Wall Street manager’."

Equity crowdfunding may be a boon for businesses that can’t easily access capital, but Cross says even experienced entrepreneurs might choose crowdfunding over traditional sources of money.

"One of the advantages might be, theoretically, control.  If you went to larger and more sophisticated investors they could potentially negotiate terms that were less favorable," says Cross. "It may be a way for you to get money from others on much more favorable terms and conditions, and depending on your product it may be a way for you to have your initial customer set."

Cross warns at this point the impact of equity crowdfunding is all speculation – until the SEC rules are issued.

"We haven’t tested that market yet," he points out. "We know that people are willing to part with $50.  We’ve seen that happen on Kickstarter and get back a tee shirt or something like that.  Are they willing to put at risk $500 or $1000 dollars in return for maybe an investment return down the road.  But maybe they loose all their money and they don’t even get a tee shirt."

Cross says inevitably crowdfunding for investors is going to involve complex rules and compliance costs that aren’t factors in donor crowdfunding.   

That’s one of the reasons not everyone is sold on the idea.

"We believe that equity crowdfunding will never work," says Gabriel Martinez is the founder of CleanCrowd, a crowdfunding portal in White River Junction.

Martinez is convinced that having hundreds of small investors is going to be a nightmare for a crowdfunded business.  One reason is that investor expectations aren’t going to be met.

"If you have 500, 600 or 700 people who expect you to be the next Facebook and you fail, you have this huge problem on your hands," says Martinez.

Martinez expects that once equity crowdfunding is available, it will take off quickly and then fizzle.

He’s developed – and applied for a patent for – a loan based crowdfunding model. 

What’s the advantage? In simple terms, Martinez says his crowdfunding platform consolidates money from hundreds of people into a single loan to a business or non-profit. 

Martinez says it’s also a much easier model to manage since it involves lenders complex investment rules won’t apply.  

Lenders don’t own a share of the business in the way investors do, so Martinez says they won’t have the same expectations. Loans are paid back as a percentage of revenue, rather than on a fixed payment basis.

CleanCrowd is still in the start up phase, but has tentatively lined up 20 companies and about 5,000 lenders. The portal is focusing on non-profits and on energy related for-profit companies that are seen to have a positive environmental impact. Martinez says he hopes to begin issuing loans by spring.

For those interested in equity crowdfunding, patience is the watchword. It may be another year before the federal rules are established.

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