Crowdfunding Eases Cash Crunch for Arkansas Startups

by Jan Cottingham  on Monday, May. 6, 2013 12:00 am  

(More: Arkansas Business' Lance Turner talks to THV 11 News' Dawn Scott about crowdfunding and how it has helped startups in the state.)

The federal Securities & Exchange Commission, however, has failed to write the regulations that would let “non-accredited” investors — those who don’t have a high net worth — buy equity stakes. Until that happens, those non-accredited investors remain shut out of equity crowdfunding.

All four kinds of crowdfunding are alive and well in Arkansas. But the reward crowdfunding (those projects that appear on Kickstarter and Indiegogo) and lending-based crowdfunding (Kiva) are so far the most visible to the casual investor and the most available to the smallest of small businesses. It’s the kind of crowdfunding sought to open a beer tasting room in Little Rock or launch a candy-of-the-month enterprise.

Risks and Rewards

Crowdfunding — at least, equity crowdfunding, the kind that hasn’t yet been opened to the public — has the potential to go profoundly wrong.

“The danger of equity crowdfunding is that you’ll lose your investment,” says Heath Abshure, Arkansas securities commissioner.

“The motivation for the investor — or the funders, I guess we should call them — is much different. With reward or prepayment crowdfunding, you’ll receive, say, a non-financial reward and you’re doing it more for the charitable aspect of helping someone along.”

“With equity crowdfunding, if the only way you can get people to give money to your plan is to promise them a return, and it is the chance of benefiting, the chance of receiving a return or a yield that’s driving that funding, that’s different,” Abshure says. “That makes it an investment.”

And the failure rate of small startups is high.

Abshure says he supports reward crowdfunding. “I’m a big fan of the reward or just the donation-based, but when you change it to equity and when you really structure it as an investment vehicle, it changes the entire thing.”

That kind of crowdfunding, depending on how the SEC ultimately writes the rules, has its own potential for change, says Ruhe of the Kauffman Foundation.

Ruhe points to a recent Kickstarter crowdfunding effort: Zach Braff, an actor best known for his role on TV’s “Scrubs,” is seeking $2 million for a new movie, “Wish I Was Here.” On his project page, Braff says a traditional film financing deal “would have involved making a lot of sacrifices I think would have ultimately hurt the film.”

 

 

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