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Texas set to allow crowdfunding investments for small businesses

posted Aug 10, 2014, 1:08 AM by Siamak Ebarhimi

This September, crowdfunding investments are coming to Texas.

The Texas State Securities Board is in the final rule-making phase of allowing small businesses in the state to solicit up to $1 million annually from both unregistered and accredited Texas investors via online crowdfunding portals.CrowdFunding advertizing

The investors, who can invest up to $5,000 a year in portal offerings, will receive equity shares in the companies in return.

Prior to this, crowdfunding over the Internet through websites like Kickstarter and Indiegogo has been limited in the state to people who wanted to contribute to a company or cause without any financial return other than promotional items. Now they will receive shares in the company.

Texas will become the 13th state to allow such individual investments to be made over the Internet, said John Morgan, Texas Securities Commissioner.

“When we started looking into this, there were three states where this was allowed,” Morgan said. “Now 12 states have passed rules or legislation to allow it. We’ve spent a lot of time looking at the rules in other states, along with talking to other experts in Texas and beyond.”CrowdFunding marketing

Previously, crowdfunding was limited to rewards such as T-shirts or other marketing giveaways in Texas, said Robert Hoskins, owner of the Austin-based public relations firm Front Page PR, which specializes in crowdfunding promotion.

The effect of the crowdfunding changes on small businesses is huge, he said.

“There are 20 million Texans 18 or older who could invest up to $5,000 a year,” he said. “That creates $100 billion in investment capital in Texas alone. Texas will be the largest equity crowdfunding state in America.”

Hoskins said the areas of industry most interested in investment crowdfunding are commercial real estate, oil and gas ventures and franchises.

Morgan said the Texas Securities Commission has broad rule-making ability and does not require the Texas legislature to pass a law on crowdfunding within state lines.

“That’s a good thing, because there may be situations where you need to tweak the rule if there are unintended consequences and you want the ability to change it,” Morgan said.

Nationally, the Jobs Act of 2012 allows for crowdfunding investments, but the Securities and Exchange Commission charged with rule-making has yet to finalize rules.

Morgan said there already are several exceptions to enable companies to sell investments directly to investors, but prior to this the investor needed to prove he or she had $1 million in liquid assets or earned $250,000 or more a year. If they met that threshold, they could become accredited investors.Kickstarter Marketing

After the final rule is passed in late August, Morgan said there will be no such requirement for investors, who will register through privately-run crowdfunding portals to search through investment opportunities.

The portals in Texas will be registered a dealers with the Texas State Securities Board, Morgan said. Background checks will be done on the portal operators, as well as unannounced inspections, Morgan said.

“The portal is an intermediary,” he said. “It will host the investor offerings, post all documents required regarding that offering and there will be a discussion area. It’s a fairly streamlined approach.”

The public forum is an important element to the portal and expected to draw expertise, allowing for the “wisdom of the crowd,” Morgan said. “The crowd will decide if it’s a good deal or a bad deal,” he said.Indiegogo Marketing

An individual offering on the portal could be dominated with incorrect or even fraudulent information, however, Morgan admits.

“I think that’s a possibility,” he said. “It could absolutely happen. This is new in Texas and throughout the U.S. A lot of people are watching it closely. But you don’t want to see bad actors ruining it for everybody. If shills or conspirators are gaming this, it’s done in the light of day in an open forum.”

Helen Stephens, a certified financial planner and co-owner of Aspen Wealth Management in Fort Worth, is not convinced the crowd expertise will winnow out poor investment choices.

“If you are talking about the wisdom of the crowd, most people don’t get into the stock market until it’s up, which is not the time to invest,” she said. “The average person doesn’t have the background to assess whether an investment is good or not.”

Stephens said such investing also can tie up savings for an indefinite amount of time.crowdfunding websites

“It would be a very illiquid investment. You put money in it but you don’t know when you will see it again,” she said. “At what point can you cash out?”

Also, the risk level of such investing is high, Stephens said.

“Everybody wants a good deal,” she said. “But most people don’t have the money to literally and potentially throw it away.”

While the state securities board says it plans to keep an eye on crowdfunding, Morgan said the agency is limited: the agency has only one inspector for every one million Texans.

The state rule will only apply to businesses and investors located in Texas, Morgan said. If either party is outside of the state, it would violate federal law until the SEC changes the rules, he said.

The securities board board will meet on Aug. 28 and is expected to finalize the rules on crowdfunding, which will then be published. It is expected to become operative in the second half of September, when applicants will begin to come in for the crowdfunding portals, Morgan said.

“It think it’s going to be a good thing,” he said. “It’s another tool in the tool kit for small businesses. The only reason we’re doing this is to help facilitate capital formation for small businesses.”crowdfunding marketing

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By David Khorram