Clarifying Crowdfunding: Promotion Via Web Won’t Be Quite So Tricky

By Danielle Woodward The Record-Eagle, Traverse City, Mich.

TRAVERSE CITY

The multibillion-dollar investment crowdfunding industry could see even more growth -- new regulations are expected to make the process easier.

The regulations -- adopted by the Securities and Exchange Commission in October -- will take effect in May. They are part of the 2012 Jumpstart Our Business Startups Act, which aims to make investment crowdfunding more accessible by easing securities regulations.

"Investment crowdfunding has been leading the industry globally, but we should see a really startling growth in the U.S. once these new rules are effective," said Kate Redman, attorney with Olson, Bzdok & Howard PC in Traverse City.

The regulations will clarify how crowdfunds can be advertised online and set limits to the amount of money an individual can invest.

The clarification is a relief for local entrepreneurs wary of the previously unclear guidelines. It inspired Bill Koucky, owner of Grand Traverse Culinary Oils, to try investment crowdfunding again after his initial attempt failed last year.

Grand Traverse Culinary Oils produces local canola and sunflower oil. Koucky hopes to raise $250,000 to build an oil refinery for his business to stay competitive with an international market.

"We're dedicated to being local so it was important that local investment be a proponent of our project," he said. "There's so many options with investment crowdfunding and it really appealed to me."

Koucky planned to gather loans through LocalStake -- an Indiana-based online investment crowdfunding portal -- but strict regulations made it difficult. He abandoned his crowdfunding efforts after receiving a cease and desist order from the state last February.

"We were proceeding with caution -- we hadn't even taken any money yet -- and we still got a cease and desist," he said.

Before that, Koucky found it hard to promote his crowdfund. Federal law prohibited him from using a website or any form of social media to advertise it. Michigan's own law -- Michigan Invests Locally Exemption -- allows small businesses to seek investments from other Michigan residents, but each investor had to be vetted to ensure Michigan residency.

"The big limit on Michigan's law is that you couldn't even ask for investments from a non-Michigan resident," Redman said. This made any sort of online promotion tricky.

"If you can't tell people you're doing it, it's kind of hard to raise any money, so we really struggled," Koucky said. "You could email people, but you couldn't have a website to direct them to. Who does business that way?"

The federal laws reflected Depression Era concerns, Redman said, meant to keep individuals from investing large sums into fraudulent business.

"It's pretty paternalistic, but the old laws reflected the federal government's continued concern for people with not a lot of money," she said

But new SEC regulations reflect a little more leniency. A formula will determine the amount of money an individual may invest -- capped at $100,000 -- based on that person's income and net worth. The regulations also account for online advertisement, allowing businesses to conduct crowdfunds on nationally registered portals and advertise them online as long as an investment is not offered or accepted.

"They are really clear now about what you can do on social media and what information you can share," Redman said. "You can advertise that you're looking for investments, but you can't post specific terms and details because that's considered an offer."

Koucky plans to start crowdfunding next month with these new laws in mind. He is in the process of registering with the state, and hopes his second attempt will be met with more flexibility.

"I think the state was taking a pretty hard line because crowdfunding was a new thing, but as the rules evolve and loosen up I think it will get easier."

But this attempt at crowdfunding will be Koucky's last.

"We're using a lot of methods and this is just one of them," he said. "It could be a tremendous tool if it loosens up, but that takes time. As a small business, you don't always have time."

Redman will offer training "labs" starting in May for businesses and nonprofits interested in investment crowdfunding.

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