NEW YORK — The idea that grew out of the Great Recession was promising: Let small businesses raise money from individual investors online without all the paperwork that usually accompanies the process of going public.
But investment crowdfunding so far doesn’t appear to be the bonanza for small companies its supporters envisioned back in 2012. Fewer than 50 small businesses have been listed on websites authorized to solicit investors in the companies since the government gave crowdfunding a green light on May 16. And the average investor has been more cautious in the early going than expected. By some estimates, half the investors are customers or family and friends of the owners — the general public either doesn’t know about investment crowdfunding or is taking a wait-and-see approach.
The 24 companies listed on the investment site Wefunder.com have raised slightly under $3 million as of Wednesday, about half the amount co-founder Nick Tommarello expected by this point. So far, the most successful campaigns are those that appeal to individual investors’ interests. The brewer Hops & Grain has 287 investors who have sent in more than $562,000 so far. Veditz, which provides online education for deaf people, has 35 investors who have sent in $19,300 by Wednesday.
“It’s going to take time for people to know it’s possible for them to get into it,” Tommarello says, but believes more people are likely to invest as companies advertise their campaigns on social media.
The opportunity grew out of the Jumpstart Our Business Startups Act. Banks had sharply curtailed their lending to small businesses during the recession, and investors who lost money on struggling companies were also more conservative.
It took four years for the Securities and Exchange Commission to write the complex regulations governing the listing and investing process; for example, the kind of financial information companies must disclose on forms filed with the SEC and available to investors on the crowdfunding websites. Some of the SEC’s biggest concerns involved protecting unsophisticated investors who might not realize that they could lose all or part of their money, says Adam Hull, an attorney with Gardere Wynne Sewell in Dallas who has worked with NextSeed, a website that has three companies seeking investors.
While millions of people have given money to businesses on crowdfunding websites such as Kickstarter, Indiegogo and GoFundMe and often get T-shirts, product samples or other giveaways in return, they are essentially making donations without the expectation of a monetary return that investment crowdfunding carries.
Under the JOBS Act rules aimed at small companies and non-professional investors, companies can raise up to $1 million over 12 months. People can invest as little as $100. They get either equity determined by the company, similar in some ways to buying shares in the stock market, or if the business is seeking debt investors, the opportunity to be repaid at a profit similar to what bond investors get. Companies have 90 days to meet their fundraising goals or must return the money. Some companies set a low minimum to improve their chances of success.
One possible downside for investors is they can’t freely sell their investments. Companies also don’t have to set a time for when the money would be returned, with or without a profit. And at this point, equity investors don’t have voting rights.
Austin, Texas-based Hops & Grain, which set a goal of $50,000 to $1 million, is selling debt securities to help open a second brewery. It plans to pay investors back what they put in, plus a return equal to that — in effect, eventually doubling their money.
The crowdfunding is cheaper than when Hops & Grain raised money from investors before, owner Josh Hare says. It spent as much as $50,000 on attorney fees and other costs in the past, while the costs this time have come to about $10,000.
“For us to be this successful this quickly makes my life easier,” Hare says. “In the future, I would definitely come back to this.”
The majority of the brewery’s crowdfunding investors are customers or Facebook followers, Hare says. In general, crowdfunding investors want to support products they like, be part of a group or feel like they’re helping build something, says Andrew Schwartz, a professor at the University of Colorado at Boulder Law School whose expertise includes crowdfunding.
“Altruism, community and things like that are going to be very significant drivers,” Schwartz says.
Companies that decide to use crowdfunding may also be those that can’t attract more traditional investors, Hull says. But as the slow start has shown, those businesses shouldn’t expect investors to pour money in. “It’s not a panacea,” he says.