Arkansas Loosens Limits, Expands Crowdfunding Options

Michael Iseman looking through a 3D printer at some of the game pieces it produces for the prototype of a board game he is promoting through a $10,000 Kickstarter funding campaign.
Michael Iseman looking through a 3D printer at some of the game pieces it produces for the prototype of a board game he is promoting through a $10,000 Kickstarter funding campaign. (Corey Krasko)
Michael Iseman, an employee at Startup Junkie Consulting in Fayetteville, with a prototype of a game he is promoting through a Kickstarter campaign.
Michael Iseman, an employee at Startup Junkie Consulting in Fayetteville, with a prototype of a game he is promoting through a Kickstarter campaign. (Corey Krasko)

More Arkansas investors will soon have more options for putting their money to work.

The Arkansas Legislature passed and Gov. Asa Hutchinson signed Act 668 in March to loosen some restrictions for non-accredited investors, though all details haven’t yet been worked out.

Act 668 was the state’s response to Title III of the federal JOBS Act of 2012, which went into effect in 2016 to help entrepreneurs and small businesses raise capital through crowdfunding.

An accredited investor is someone whose net worth is at least $1 million or whose annual income is $200,000 or more. Non-accredited investors don’t meet those qualifications and, before Title III, were heavily restricted from equity investing in private companies.

The new state law is directed at Arkansas companies with Arkansas investors. Individual non-accredited Arkansas investors can invest up to $5,000 in an Arkansas-based business.

The law was sponsored by Rep. Robin Lundstrum, R-Springdale, but was drafted by the Arkansas Securities Department. ASD Chief Counsel David Smith said the department wanted to get the bill enacted two years ago.

The department hopes to have rules and regulations for Act 668 finalized in time for its implementation in August.

“This is something that has been studied by the state for some time,” Smith said. “A number of other states have had this law in effect. There are pluses and minuses to it. There were arguments of ‘it’s going to be rampant with fraud.’ By limiting the amount people can invest, that limits their risk exposure. There are some safeguards in there with it.”

Title III of the JOBS Act opened the door for small-time investors, but not many people have used the opportunity. ASD Deputy Commissioner Ann McDougal said the department hasn’t received one filing of investment since the JOBS Act went into effect in May 2016.

“Unfortunately, the tidal wave of changing how businesses are capitalized hasn’t really been realized to the effect that the early dreamers might have hoped,” said James Murphy, CEO of EquityNet. “If you look at the amount of money that goes into small businesses on an annual basis in terms of equity versus loans, the lending market just squashes the equity market. The majority of volume that is fueling liquidity in the small business space is with loans.”

Shopping for Dough

EquityNet is an online platform to help entrepreneurs and businesses connect with willing equity investors. It was founded by Judd Hollas in Fayetteville in 2005; Hollas left the company in 2015 and the company left Fayetteville and was acquired by Pittsburgh investment bank Capital Foundry in 2016.

Murphy, who replaced Hollas as CEO, said the best part of Title III is that it allows general online solicitation of funding, so it makes it easier for businesses and money to find each other.

“One of the most important things in general is that discovery process,” Murphy said. “It’s amazing how many deals get done very localized in Texas, in Arkansas. It wasn’t necessarily that you found someone outside the state. Even if a guy lives a mile away, you’re not going to run into him at a coffee shop and know he’s looking for funding. It’s a great discovery method for like-minded, whether you’re looking to invest or be invested in.”

Murphy said EquityNet focuses more on established companies looking to expand rather than startups. Title III, while opening up the door to small investors, can still be restrictive.

“The specific Title III rule is actually a very arduous fundraising process; it’s very expensive,” Murphy said. “The thinking by the legislature is that if we’re letting non-accredited investors in, these are non-sophisticated investors, we need to put a lot of safeguards in place. The safeguards on a small investment take up a lot of time and effort and costs. The end result is not a lot of money has transacted in that regulation, a miniscule amount.”

McDougal said the state regulations will have some of the same provisions of Title III, and Smith said the administrative expenses shouldn’t be a recurring fee that becomes overly punitive.

“People who are raising $100,000 to $500,000, it does give you access to whole new group of investors previously you had to turn away,” said Cal Rose, an attorney at the Wright Lindsey Jennings law firm in Rogers who specializes in securities and investments, before referring to the $5,000 limit per investor. “I think this will actually be used and be helpful. That’s still a sizable enough piece. It can make a difference.”

Getting the Word Out

Equity crowdfunding isn’t the only way a company can get itself some startup or expansion dollars. Entrepreneurs can use online platforms such as Kickstarter and Indiegogo that don’t offer equity but other incentives.

Two years ago, friends Michael Iseman and Jay Clark dreamed up a board game patterned after the classic Life game but with a modern, mature twist. To get the game to market, they started a Kickstarter campaign to raise $10,000 — after an attempt to raise $25,000 failed.

Everyone who pledged $30 was promised a first-edition game. Those who gave $100 also got a video of the two men doing a silly stunt like eating a spoonful of Cinnamon or slapping one another.

Iseman, a University of Arkansas graduate and an employee at Startup Junkie Consulting in Fayetteville, is a serial entrepreneur who was part of a team in college that started a business for a robotic arm for use in pathology labs. Still, all of his and Clark’s ideas were stagnant until they were able to raise $10,500 through Kickstarter.

The first 540 games are due in Fayetteville later this month; 190 are pledged to their contributors.

“With more attention, we could bridge that education [gap] of what is crowdfunding, then there would be a lot of room to grow,” said Iseman, 25. “The first time we launched our board game on Kickstarter, I had a lot of people congratulate me for launching. They didn’t understand, ‘No, this is when I need your help. This is nothing if Kickstarter isn’t successful.’”

Whether investors have deep pockets or not, Murphy said that building the crowdfunding industry is important, and having professionals manage the system is key as the investor class grows.

“It’s a safe investment and a good investment to invest in growing companies,” Murphy said. “I’m not so sure it should be click on the TV and throw some cash at whatever pops up. There is a big time appetite. People are going to the private markets.

“With interest also comes a lot of bad actors. You see a rise in everything, which is why it is important to go to places there are established and have been around for awhile and know what to look for.”