The Pros and Cons of Crowdfunding

By Drew Foster
Tri-City Herald (Kennewick, Wash.)

After developing a computer program that would allow anyone to present and solve software problems, Sidd Goyal and his team needed money to get their product on the market.

They considered venture capitalists, but they hesitated to attach a monetary value to their conceptual idea. Instead, the Pacific Northwest National Laboratory engineer turned to the crowdfunding site AngelList, where his team sought $100,000 to create a prototype of their Fixoncloud programming platform.

“It’s better to have more than one person than a single venture capitalist,” Goyal said.

Goyal’s initial attempt at crowdfunding — raising money through groups of sometimes-unknown investors, largely across the Internet — fell short, but he’s considering using it again when a newer, simpler Fixoncloud prototype is developed.

Equity crowdfunding has evolved in the past few years, especially since the 2012 passage of the federal Jobs Act. Washington passed its own crowdfunding legislation earlier this year.

Seattle attorney Joseph Wallin, who wrote Washington’s crowdfunding bill, will share his expertise on the subject Nov. 18 during a presentation at the Energy Northwest auditorium in Richland.

“Companies want to raise money and they don’t know how to do it,” he said. “They need to find a correct, legal pathway to do it.”

Wallin said he was dissatisfied with provisions in the federal Jobs Act, so he wrote his own legislation, spoke to a state legislative committee about making Washington more business-friendly and, earlier this year, saw the bill passed.

Washington House Bill 2023, unlike the federal Jobs Act, does not require companies seeking crowdfunding to have audited financial statements, and it does not mandate the use of an intermediary who takes 8 to 10 percent of the offering’s proceeds.

Wallin said Washington is ahead of the curve in its regulation of crowdfunding. The bill Wallin crafted reduced restrictions faced by entrepreneurs and business people who seek crowdfunding.

Like the federal Jobs Act, Washington’s law allows companies or individuals to raise up to $1 million in a one-year period.

Unlike the Jobs Act, Washington companies are not required to present audited financial statements if they want to raise more than $500,000.

However, the state law requires all offerings be within Washington’s borders, the issuer must be a Washington corporation doing business in the state, investors must be Washington residents and companies cannot advertise their offering.

Wallin said technology is still catching up to the bill. Numerous websites already facilitate equity crowdfunding, such as AngelList, but hundreds of others focus on smaller projects that don’t involve equity, such as Kickstarter.

Wallin said House Bill 2023 could create a new equity crowdfunding marketplace specific to Washington businesses and investors.
“This is a great topic because crowdfunding is going through some fundamental changes,” said Gary Spanner, Tri-Cities Research District board of directors chairman, who helped bring Wallin to the Tri-Cities.

Forbes Magazine estimated crowdfunding in 2013 to be a $5.1 billion economy — up from $1.47 billion in 2011. It’s used by businesses large and small.

Sites such as AngelList cater to wealthy investors and companies seeking six- or seven-figure investments, while sites such as Kickstarter promise investors gifts like T-shirts, coffee mugs and future products.

Sites like AngelList also offer investors a stake in the business.

AngelList relies on accredited investors who work along side so-called “angel” investors — affluent individuals who work in teams or alone — to provide capital to a business in exchange for convertible debt or ownership equity.

“That’s a tidal shift,” Spanner said of angel investors. “That’s a big deal.”

Non-equity crowdfunding sites such as Kickstarter allow entrepreneurs to aim a little lower.

After buying the Smooth Stride riding jean company in February 2013, Desiree Johnson of Kennewick found a design flaw in the seamless riding pants and realized the problem had to be corrected before the jeans reached the market.

That required money, so Johnson, 54, turned to Kickstarter in mid-January with a goal of raising $30,000 to redesign the pants.

In 30 days, Johnson raised $33,248 from 268 backers. The website also helped Johnson spread the word about her product.

“Kickstarter was a good way to advertise,” Johnson said. “I spent all summer talking about my jeans.”

Her jeans were sewn in October and should be available in the coming months.

Angela Kora, co-owner of Ethos Bakery in Richland, also had success with Kickstarter. Kora turned to the site in September to raise $50,000 to transform Ethos Bakery into Ethos Trattoria, a full-service eatery.

The Kickstarter campaign raised $40,717 from 176 backers. Failing to reach its $50,000 goal, Ethos didn’t receive so much as a penny in the all-or-nothing world of crowdfunding. Kora and her team relaunched a more modest Kickstarter campaign in late-October. Ethos sought $35,000 and, in seven days, raised $37,690 from 205 backers.

“We really wanted to do Kickstarter because our business was built out of the community,” Kora said.

Kora said Ethos would likely expand through a combination of crowdfunding, bank loans and personal investment.

Kora said Kickstarter presented Ethos with no upfront costs such as sign-up fees, but took 3 percent of the contributions. She said Ethos is planning to open its full restaurant in the Parkway early next year.

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