Entrepreneurs await rules for crowd-funding clause

Webster City, Iowa electrician and inventor Brad Martin recently displays his grenade-shaped bottle opener on January 8.
  • JOBS Act designed to help startups raise money.
  • SEC rules were due Dec. 31%3B agency hasn%27t said when they will be ready.
  • Critics fear easing of restrictions could open inexperienced investors to fraud.
  • DES MOINES, Iowa — In April, President Barack Obama signed the bipartisan Jumpstart Our Business Startups Act into law. The entrepreneurial community cheered, saying the law would help small businesses raise money during their most vulnerable periods, when companies try to move from early to late stage.

    “The thing that kills startups is not having enough initial investments,” said Dickinson law firm attorney Marc Ward.

    More than nine months later, the Securities and Exchange Commission still has not said when the rules would be unveiled. SEC officials said that they typically don’t release timelines while working out rules and that they would give a one-week notice when a hearing is scheduled.

    The delays in the rules have some industry experts worried that the SEC’s regulatory instincts will lead to rules that could render the crowd-funding — the act of raising money in small increments from multiple investors in exchange for equity in the company — clause irrelevant.

    “They could regulate it to an extent that the law passed last year could end up being much ado about nothing,” Ward said.

    Brad Martin is using a crowd-funding website to help produce a grenade-shaped tool, a launching point that he hopes could ultimately lead to multiple products and a small business.

    The Webster City, Iowa, inventor has used Kickstarter to raise $30,000 and counting in three weeks. As of Friday, 925 backers were interested in his bottle opener/wrench.

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    “I just had to try,” Martin said. “After all, I’m not out anything if I fail.”.

    Other websites might soon offer a similar opportunity to entrepreneurs who want to raise money for their businesses. But startup supporters are worried that regulatory delays could limit crowd funding.

    Critics of the law have argued that easing restrictions against crowd funding could open up inexperienced investors to fraud. The law limits crowd funding to $1 million during a 12-month period, but those investments are no longer limited to accredited investors. Accredited investors must have $1 million in net worth or an income of $200,000 in each of the past two years.

    To protect investors, the law requires that solicitations of money go through regulated crowd-funding portals. But the SEC missed the Dec. 31 deadline for the rules governing those portals. The JOBS Act required the SEC to create the rules 270 days after Obama signed the law April 5.

    Lawmakers say they are wary of the rules the SEC will implement, although they will wait until they see them before passing judgment.

    “Unfortunately, agencies almost always take longer to write regulations than their stated deadline,” U.S. Sen. Chuck Grassley, R-Iowa, said in a statement. “Ultimately, it’s more important to get the regulations right than to get them done in a hurry. In this case, the SEC has to fulfill the dual missions of increasing investment opportunities while protecting investors from harm. As long as the SEC appears to be making progress on regulations that follow congressional intent, a reasonable amount of time to wait is acceptable.”.

    Both Grassley and Iowa Democratic Sen. Tom Harkin supported the final version of the JOBS Act, which flew through the Senate with a 73-26 vote. The House also overwhelmingly passed the measure with 390 representatives voting for the bill and 23 against.

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    One of the most vocal crowd-funding proponents said he remains hopeful that SEC officials will settle on rules soon and that they will be “balanced and responsible.”.

    “Young, high-growth companies account for nearly all job growth in the country,” said Startup America Partnership CEO Steve Case, who attended the signing ceremony at the White House in April.

    Case said he trusted that the SEC would keep the rules within the spirit of the law, which he said is designed to give all entrepreneurs access to capital.

    “Some of the right mechanisms to strike a good balance were built into the bill,” he said. “I am hopeful they finalize their work soon. There are some in the crowd-funding community that are concerned that it has taken longer … And could result in more regulations than is appropriate. I hope that’s not the case and don’t expect it to be the case.”.

    Others are not so sure.

    Mike Colwell of Greater Des Moines Partnership’s Business Innovation Zone said the SEC now controls the JOBS Act.

    “I am very fearful that when they are done, there will be a lot said but not much done,” said Colwell, who has mentored a number of startups across Iowa. “The way it works is the people who write the rules write the law. Once the law is passed, there are no champions with a voice as loud as the SEC. No industry groups are going to get behind fighting the SEC.”.

    Colwell is concerned that SEC rules might lean toward protecting new investors, rather than open up new capital opportunities for entrepreneurs. He said it’s imperative the JOBS Act be allowed to serve its purpose.

    “We have to make it viable for more people to make investments that are safe,” Colwell said.

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    Martin, with the Kickstarter project, said getting his product off the ground would not have been possible without others pitching in. Kickstarter is legal because it offers rewards, not equity. Its users create projects and establish a financial goal and deadline.

    Entrepreneurs offer tiers of support that backers can choose to get specific rewards, such as a product when the project is finished. Martin started with a goal of $2,500; he surpassed that goal in roughly 25 hours and keeps attracting donations.

    Martin’s product is shaped like a grenade and includes a round opening lined with teeth that can grasp a bottle cap. In addition, holes in the body are shaped to be used as a tool-bit holder, and an opening on the edge can be used as a wrench.

    Martin said crowd-funding sites help people who might not know much about business get a jump-start on their ideas.

    “Kickstarter opens a whole new world of opportunity for people that would normally just sit on the couch and watch TV all day,” said Martin, who works in manufacturing and has a small computer numerical control mill in his garage. “They have ideas about how to make things better, but it’s just so hard to capitalize on those ideas if you don’t know someone that has already accomplished something.”.

    Crowd-funding sites.

    Many crowd-funding sites are already operational, though project owners cannot offer equity in a company in return for “donations.” Here is just a small sampling of these sites:.

    Kickstarter: Popular site leans toward the creative crowd. More than 2.5 million people have pledged more than $350 million to fund more than 30,000 projects since its 2009 launch.

    Indiegogo: Another site that supports creative projects and offers “perks” to supporters.

    Razoo: Site raises money for causes more than projects. It has raised $135 million for nonprofits.