Unless you’ve been living under a rock for the last year or so, you’ve heard of crowdfunding. I know a lot of people who have participated in campaigns on Kickstarter, Indiegogo, and more. I’ve backed a few myself. But that’s been as a way to fund development of better iPhone peripherals, or an independent film, or even to convince a touring musician to come to your city.
A couple of things happened this month to make it more relevant to our day jobs.
The basic idea of crowdfunding is simple: you aggregate enough small donors to raise enough money to accomplish a predefined project. So it’s not like subscribing to give $50 per week to your church forever. It’s giving $50 once to a particular campaign. And since Kickstarter is “all or nothing,” you don’t pay a dime if the overall campaign threshold isn’t reached.
You may or may not get some sort of “reward” for participating at a certain level. This may be an early version of that iPhone peripheral you want, or it may be intangible like having a favorite singer write your girlfriend’s name into a song, or just the warm fuzzy feeling of having helped hurricane victims on Indiegogo. After four years of operation, the average Kickstarter campaign has raised about $5000, although a couple have caught fire and raised millions.
She Blinded Me With Science!
One of the things that the existing crowdfunding platforms aren’t good at is funding scientific and engineering research. That’s because the most important part of a campaign is a compelling video, not the quality of the science underneath.
Allison Mercer of GTRI wanted to change that. For over a year, she and her team have been developing Georgia Tech Starter, the world’s first peer-reviewed, university-based crowdfunding platform for science and engineering projects. It is a platform for students, scientists, and engineers to engage directly with the world wide community, and to receive market feedback on their projects. GaTechStarter is also an experiment to see if the world is ready for a more active role in the scientific process.
We’ve already submitted several VentureLab projects to be loaded on the site when it goes live (very soon!), and we’re encouraging people across campus to do the same. Since it’s leveraging the Georgia Tech brand, projects will be peer-reviewed, and will comply with all relevant campus alphabet soup (IRB, IUCAC, COI, etc.).Projects will be posted on the site for 60 days, and donors will be charged only if the funding goals are reached. We’re targeting campaigns of $5000 or so to generate seed funding or to help gather data for a larger project. Although much of Georgia Tech Starter will be hardcore laboratory science, there’s no reason we can’t use it for research inside of EI2. Launching soon!
Selling the Dream
Most of you know that I used to be a venture capital investor, and I still make angel investments. Usually, those investments take the form of equity — ownership of a percentage of the company, exercised through purchase of stock or other financial instruments. In the U.S., those sorts of investments have been limited to “accredited investors,” which loosely translates as “having enough money that they ought to know better.”
But sometimes you aren’t ready to bring investors like that into the ownership of your company… the epithet “vulture capitalist” exists for a reason. There’s been a lot of interest in “crowdfunding equity” — being able to sell small amounts of stock to lots and lots of small investors.
At the Federal level, the JOBS Act of 2012 has language enabling crowdfunding of equity investments. But specific rulemaking was left to the SEC (Securities and Exchange Commission), which has already missed one deadline and looks likely to miss another. Lots of platforms have sprung up to match buyers and sellers, but they can’t actually complete transactions yet. So an entire class of investable companies are stuck in neutral.
This time, Georgia is at the forefront of financial innovation. (Those of you old enough to remember when inter-county banking was illegal in Georgia will be shocked. I know I am!)
In 2012, the Secretary of State’s office promulgated a new set of securities regulations that included the “Invest Georgia Exemption.” The rules:
- You must be a for-profit business incorporated in Georgia. (No Delaware corps! Luckily, Georgia corporate law mimics Delaware’s, so no problem here.)
- You must be headquartered in Georgia and carry out a significant portion of your business in Georgia.
- You can sell up to $10,000 of stock per year to any individual who is a resident of Georgia, regardless of their income level.
- In aggregate, you can sell up to $1,000,000 of stock to Georgians per year.
- Funds must be deposited in a Georgia bank.
- Once you start the process, you have to fill out a form (PDF here).
There are some other rules, but those are the basics.
So… crowdfunding equity is legal in Georgia! Right now! You don’t have to wait for the SEC.
And it’s not just for startups. Nothing in there specifies “small business,” or “startup company,” or “technology company.” A Mom-and-Pop grocery store could sell stock if they follow the rules. Or a privately-owned clinic. Or a family-owned metal fabrication shop.
This is an amazingly powerful exploitation of an 80-year-old provision of Federal securities laws that no one noticed until Kansas passed their new rules in 2011. Right now, Kansas and Georgia are the only two states with an exemption, although North Carolina and Washington state are expected to follow suit this year.
Although the law has been in place for over a year, companies and investors are just now noticing. Be sure to tell your clients about it, and refer them to the Secretary of State’s site for the detailed rules. And if you’re interested in owning something with a little more profit potential than a new iPhone case, you can check out existing equity offers at SterlingFunder (an ATDC startup!).
The Wisdom of Crowds
Georgia Tech Starter is purely for donations; you don’t get anything in return except the knowledge of helping to advance knowledge. And crowdfunded equities are incredibly risky, and likely to return zero on your investment. But, heck, ninety percent of “professional” investment managers don’t match the performance of broad stock market index funds. Don’t invest money you’re not prepared to lose… but welcome to the brave new world of crowdfunding!