Crowd funding takes private equity to the masses
Or will it prove to be a trap for luring old folks and other unsophisticated investors into risky bets on unproven businesses?
Or perhaps a bit of both?
Whatever the ultimate impact, equity crowd funding is about to become reality, as evidenced by last week’s announcement of the formation of RelayFund, which said it is preparing to launch the first equity-based crowd funding website in Michigan. The site, relayfund.com, is in beta testing now.
Crowd funding is a term for raising money online for a variety of purposes — popularized first by charities, political campaigns and projects to create music, films or product designs.
In April, the JOBS Act passed by Congress and signed by President Barack Obama opened the door for private companies to seek funding this way from a wider pool of small investors, with fewer legal restrictions.
The U.S. Securities and Exchange Commission is expected to issue detailed rules for equity crowd funding in January.
Filling a gap
“We expect there will be a lot of competition. There are probably 100 sites in process across the country waiting for the SEC rules,” said Jeff Lambert, CEO of investor relations firm Lambert, Edwards & Associates, a partner in RelayFund. Other partners include Grand Rapids investment bank Hartwick Capital and Ken Kousky, head of the MidMichigan Innovation Center in Midland and founder of the Blue Water Angels investment group.
RelayFund expects start-ups like lifestyle companies — restaurants, bicycle shops — that are too small for bank loans or venture capital will be among the early users.
“Crowd funding could be a great way to fill a gap in the space where family and friends or the entrepreneur may have used home equity to put up the early-stage cash of $50,000 to $200,000 in the past,” said Michael Finney, CEO of the Michigan Economic Development Corp. “But that option does not exist now because of falling home prices.”
Lambert said RelayFund’s goal, aside from merely raising cash, is educating entrepreneurs about “how do I value my business, how do I do a road show, how do I do a business plan so I become attractive to investors?”
Josh Linkner, head of Detroit Venture Partners and founder and former CEO of ePrize, is both enthusiastic and cautious about equity crowd funding.
“On the upside it encourages entrepreneurship. Anything we can do to provide capital is fantastic,” he said. “Will people really want to do it en masse? Will it fund 20 start-ups or 2,000? I don’t know.”
Either way, he’s hoping that the SEC rules will be clear and impose sensible limits. “You need to protect the old widow from risking too much,” he said.
“There also can be a tendency to bet on a highly charismatic individual, and there’s no guarantee that’s the best choice,” he added. “For the layman, making a venture capital investment is a very risky proposition.”
RelayFund is based in Detroit and has a development and operations team in Grand Rapids, said Lambert, whose firm has offices in both places.
Crowd funding sites like Kickstarter, Indiegogo and Quirky are already shaking up the worlds of charity, creative projects and product design.
How it will play out in debt and equity funding remains to be seen. But the word “disruptive” is probably a good bet.
Contact Tom Walsh: 313-223-4430 or email@example.com
Source: Detroit Free Press