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Law lets investors crowdfund

posted Jul 12, 2014, 11:24 PM by Siamak Ebarhimi

Hoosiers who don’t have a fistful of cash now have a new option to become equity investors in Indiana businesses.

The secretary of state’s office has developed new rules that allow individuals to use crowdfunding to invest up to $5,000 at a time in privately owned businesses. It also permits Hoosier entrepreneurs to use the popular online fundraising strategy to raise up to $2 million to start or grow a privately owned business.crowdfunding marketing

State lawmakers this year passed legislation on crowdfunding that went into effect July 1 and led to this opportunity for small investors to support homegrown firms.

“It is intended to be one more tool to help Indiana companies get off the ground and stay productive,” said Secretary of State Connie Lawson. “This new market will change the way Indiana entrepreneurs and investors connect.”crowdfunding advertising

Traditional crowdfunding began as an online fundraising strategy to allow the public to donate small amounts of money. More typically, the money is donated through social networking websites to help artists, musicians, filmmakers and others.

But under the new law, businesses can use crowdfunding to attract investors.indiegogo marketing

“It’s going to be really important for a lot of small businesses throughout Indiana to be able to raise funds this way,” said Jason Whitney, executive director of the Innovation Center, a business incubator in Richmond. “I’m really proud of the state of Indiana for taking this step forward and being one of the first states to offer this for our entrepreneurs.”

Two other states, Michigan and Wisconsin, started crowdfunding online investment programs this summer, said Lawson. Georgia and Kansas have similar investment opportunities but not online.

Nationally, Congress passed in April 2012 the JOBS Act, which instructed the Securities Exchange Commission to draft rules to implement crowdfunding. But rules haven’t been created yet.kickstarter marketing

In Indiana, the online crowdfunding can be used in conjunction with more traditional financing options, according to Lawson. But with more smaller investors, crowdfunding might allow entrepreneurs to better stay in control of the vision and direction of their businesses, she said.

Previously, she said the only people who could invest in private business offerings were “accredited investors” — those with $1 million net worth or an individual income of $200,000 or joint income of $300,000. During the Great Depression, the federal government banned private companies from soliciting investments from the general public to limit fraud.kickstarter project

But Lawson, speaking at The Speak Easy, an Indianapolis site for entrepreneurs, startups and supporters to work and collaborate, said so much more transparency exists now because of the Internet, so this restriction is no longer needed.

Still, investors need to be wary.

“Hoosiers need to be aware of the risks before they invest, and they should always do their research before investing,” said state Securities Commissioner Carol Mihalik, who helped develop the rules with staff and the advice of local businesses.

Rules under the new law help limit the risk. Businesses that want to participate have to register with the secretary of state’s office and submit their offerings and financial information and the names of their escrow agent and Internet hosts. If companies don’t want to submit their financial data, they can raise only up to $1 million.CrowdFunding advertizing

Investors visit the Internet host sites to find and learn about companies in which they want to invest. Funds anyone invests will be directed to an escrow account until the business has raised the amount of funds it committed to raise in a period of time it chooses.

If all the money is raised in time, the funds are invested in the company. If not, investors get their money back.

“We will monitor crowdfunding just like any other security,” said Lawson.

She doesn’t expect a great influx of businesses using this method at first, but she expects it will catch on as more businesses realize its benefits. Lawson said the crowdfunding could be helpful to businesses such as restaurants, breweries, organic farms, tech firms and other startups.

But it also might be a bit of a hassle.

Jim Brown, founder of PorchLight, an app to help people manage home improvement projects, is being cautious and taking a wait-and-see approach. His app, now being tested in about 50 homes in Hamilton County, gives homeowners information on upkeep, lawn care and when and how the work needs to be done. He hopes to launch it in September throughout Indianapolis.CrowdFunding marketing

“If you try to raise $2 million, $5,000 at a time, that’s a lot of people to have to manage and send reports to and keep up to date,” he said. “That’s a bit of a challenge.”

The crowdfunding looks helpful, Brown said, but it actually might be harder to raise money this way than from the traditional type of investors. He also said the $5,000 limit is too low and could be higher, like the $10,000 limit in Michigan.Kickstarter Marketing

Whitney agrees that limit is somewhat low if a business is trying to raise $1 million or more from smaller investors.

“But from what we see in Richmond, there is a higher number of people who are really looking for that smaller amount of money,” he said. “So, it should have a greater impact for those smaller companies to be able to stay open or grow and hire more people into the workforce.”Indiegogo Marketing

He believes several startups that are tenants in his Innovation Center might take advantage of this opportunity to raise smaller amounts of money.

“This would give me an opportunity to invest in other businesses, too,” said Whitney.

Since the Midwest is a fiscally conservative area, he said, he expects getting people enthusiastic about high-risk opportunities might take some time.

“But once people see how it’s going to affect their community,” he said, “they might be more willing to invest.”crowdfunding websites

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By David Khorram