Power of the crowd: A new way for businesses to raise money
Friday, December 2, 2016
Many people know crowdfunding as a means to raise money for a cancer-stricken relative, independent movie project or study-abroad trip. But now small businesses are harnessing the power of the crowd to start or expand their enterprises.
Two experts spoke Wednesday night at East Carolina University’s Willis Building about the advantages and disadvantages of crowdfunding for businesses.
The panel was the first in a series on business-related topics being held at SEED@ECU, a business incubator that moved to the Willis Building in October as part of its relaunch.
Panelist Benji Jones, an attorney with Raleigh law firm Smith-Anderson, said crowdfunding for businesses, called investment crowdfunding, is similar to traditional crowdfunding, called donation- or reward-based crowdfunding, but there are key differences.
“It’s not different from the successful Kickstarter campaigns. It’s just a different path and a different way of raising the money,” Jones said, referring to the popular crowdfunding website Kickstarter.com.
Traditional crowdfunding might offer nominal prizes, such as T-shirts or posters, in exchange for donations, or nothing at all. Investment crowdfunding, however, offers shares of the company in exchange for money.
It takes much longer and is highly regulated by the government, said panelist Leo John, an investor and business outreach legal specialist at the securities division of the N.C. Secretary of State’s office.
“As soon as you start promising people some kind of profit or return, you’re moving into investment crowdfunding,” he said.
Investment crowdfunding became available on the federal level in May. Under Title III of the 2012 Jumpstart Our Business Start-ups, or JOBS, Act, businesses can raise up to $1 million per year through the process. The law passed in 2012, but it has taken four years for government officials to come up with the regulation structure for it.
John said more than 150 businesses have signed up for the program, but none from North Carolina. The secretary of state’s office is working to educate small-business owners about the federal program and a similar state program that should be available in 2017.
State legislators passed a bill in July that allows for investment crowdfunding on the state level. The program, called NC PACES, will not be available until its regulation structure is set up. The state program will allow for the raising of up to $2 million per year. Both the company and investors must be North Carolina residents.
Jones said small-business owners should carefully consider whether investment crowdfunding is right for them.
“Understand that the price of having access to all these investors that you never had access to before is the fact that you will have more burdens to comply with,” she said. “You will have to provide disclosures to these people when they try to buy your shares, and then you will have obligations to provide ongoing reports to them.”
She said the process also will be costly.
Starting in January, SEED@ECU will host monthly panels on topics related to starting or running a business.
Originally called Greenville SEED, the program operated for several years in various downtown locations. Now, it is partnering with ECU to provide opportunities for students from the university, as well as Pitt Community College and local high schools, to turn their business ideas into a reality.
A ribbon-cutting ceremony for the new program will be held early next year, said John Ciannamea, interim director of the program and ECU’s innovator-in-residence.
Contact Holly West at email@example.com or 252-329-9585.