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Equity crowdfunding allows anyone to invest in start-ups

  • Lee Garland rides a bike promoting QaZing, which is seeking investors through equity crowdfunding, at an event in Peterborough. JENNIFER MELI / Monitor staff



Monitor staff
Friday, June 24, 2016

 

Like most startups, QaZing in Peterborough needs to raise money. And like many, it needed to choose between crowdfunding and selling equity to rich investors.

But unlike any other startup in New Hampshire, it’s doing both.

QaZing, which makes an app to connect people with a variety of services in the on-demand marketplace, is the only company in the state to have sought investors under new federal equity crowdfunding rules. This system, which has been in the works since 2012 but only went fully into effect in May, allows virtually anybody to buy equity in a private company, something previously limited to accredited investors with at least $1 million in net worth.

“For the first time, anybody, not just the wealthy, can invest in a local company,” said Jason Garland, CEO of QaZing, which has an office on Peterborough’s Main Street. “It’s often the case that a local startup company, if it has the whole community behind it, has a much greater chance of success.”

If you donate to a company through Kickstarter, you might get a T-shirt or a gizmo; doing it through StartEngine, the equity crowdfunding portal used by QaZing, gives you a piece of the company that, hopefully, will rise in value. (For details, go to startengine.com/startup/qazing.)

Equity crowdfunding, officially called Regulation Crowdfunding Title III or Title IV from Securities and Exchange Commission rules and legislation, is so new that the New Hampshire Bureau of Securities Regulations issued a cautionary press release about the topic Thursday even though the state has virtually no oversight in this area.

“It’s just getting started, so we have to see how it develops. What we’re really focused on is making sure that investors realize that it’s out there, but that you’re dealing with startup companies, which have a high failure high, high rate of risk,” said Kevin Moquin, senior staff attorney for the Bureau of Securities Regulation. “You need to know what you’re getting into.”

If an equity crowdfunded investment disappears, he said, New Hampshire would get involved only if there was fraud. Otherwise, investors beware.

The general concept of equity crowdfunding isn’t new: When a company goes public and sells shares of stock, it’s raising money by selling lots of tiny pieces of itself to lots of people.

Equity crowdfunding uses the internet and systems made familiar by crowdfunding sites like Indiegogo and Kickstarter to allow small firms to do this while avoiding the cost and complexities of going public – they don’t, for example, have to provide audited financial statements.

On the investor side, it allows ordinary people to play the role of “angel investor” – accredited (meaning well-off) people who give money to startups in return for a piece of future rewards.

Becoming an investor is very similar to donating through Kickstarter. You find an offer through one of various equity crowdfunding portals, sign up and pay money if you are interested. The big difference is that there are limits on how much you can invest, requiring calculations of the sort usually encountered only at tax time, e.g.: “If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5 percent of the lesser of your annual income or net worth. If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10 percent of annual income or net worth, whichever is less, but not to exceed $100,000 or all crowdfunding offerings in any 12 month period.”

Investors receive notice of their equity holding, assuming the company reaches its minimum investment goal (otherwise, as with Kickstarter, the money is returned to investors), and after holding it for a year, the investor can decide what to do with it. If the company is still around and successful and other investors are interested, in theory it can be sold for a profit.

The whole idea of using online crowdsourcing to help new firms get easy access to investing capital got started in 2012 when President Obama signed the Jump-Start Our Business Start-Ups Act. But it took the Securities and Exchange Commission four years to write all of the rules, largely because of concerns that lack of oversight given to companies selling stock would make it too easy for people to invest badly or be ripped off.

“Crowdfunding offers another way for early-stage companies to raise capital and expand their businesses, but investors should be on the lookout for unscrupulous issuers and intermediaries attempting to misuse crowdfunding to steal from investors through false and misleading representations,” warns the New Hampshire Bureau of Securities Regulation.

Individuals can invest a maximum of between $2,000 and $100,000 a year in crowdfunding companies, depending on earnings and net worth.

If QaZing meets what Garland admits is a small investment target of $22,400, investors will get shares in the company that can be traded within a year. It’s not clear at the moment exactly who would buy them, since they aren’t sold on the traditional stock exchanges.

That’s a big part of the risk and uncertainty; along with the fact that only small startups will use equity crowdfunding – you can raise a maximum of $1 million a year via this route – and such firms have a very high failure rate. If QaZing goes under, the shares will be worthless.

Garland, who graduated from ConVal High School in 2011, says that won’t happen.

QaZing has about 10 employees at the moment, and is tweaking its app, which can be used to hire people to do a variety of tasks – “technical support, yard work, errands, tutoring, etc.” says the website. It is sort of like Uber, except rather than hiring a short-term ride, you hire a short-term assistant.

Garland said the company’s crowdfunding is going slowly, because it’s so new.

“Honestly, we were hoping for more. It has become clear it will take more time to educate people. Most people don’t even know what crowdfunding is, and this new crowdfunding equity concept is hard for them to understand,” he said.

It’s hard for regulators and businesses to understand as well.

“There are tons of questions – even with marketing. The SEC says you can do this, but you can’t do this – there is tons of room for interpretation,” Garland said.

But he’s hopeful that a company promoting a technology-based change in the way we do daily business will benefit from a technology-based change in the way we do investing.

“It really is an awesome opportunity for people to invest, and for companies,” he said.

(David Brooks can be reached at 369-3313, dbrooks@cmonitor.com or on Twitter @GraniteGeek.)