You might not want to invest the down payment for your house, or the contents of your 401(k).
Your wedding fund? Sure — if you’re not that committed to your betrothed.
Investors who have long wished they could pour their savings into the latest local startup, but were stopped by their sub-$1 million bank accounts and government prohibitions, have a new chance to bet on small companies.
Georgia is one of only two states, along with Kansas, that have carved out a rule allowing less-wealthy in-state residents to put money into local businesses. The new rule allows those who were previously excluded to spend as much as $10,000 to buy stock in, or make loans to, a Georgia company they want to help get off the ground.
The local money is seen as an opportunity for small businesses to access funding if they can’t get a bank loan, or don’t entice venture capitalists. But young companies are likely to fail, and there is concern that unsophisticated investors may not understand the risk they take when they decide to support a new typing technology or a social network for runners.
“These people are essentially rookies at evaluating business plans,” said Tony Plath, an associate professor of finance at the University of North Carolina, Charlotte. “It’s not an investment everybody should be making.”
Equity crowdfunding, as it is called, differs from sites like Kickstarter or Indiegogo, popular online fundraising platforms. With those sites, people across the country can spend $10 or $1,000 so their favorite canceled TV show can become a movie (“Veronica Mars”) or so an Athens artist can build a “Love Shack”-themed bus stop. In return, they get a copy of the script, or a T-shirt with a picture of the shelter.
Georgia crowdfunding does not result in a reward. Instead, funders become partial owners of the company, or make a loan that they hope will be repaid.
Nationally, rules are still in the works to allow such small investments across state boundaries. But here, local businesses are now allowed to raise up to $1 million from Georgia residents. Ten companies registered with the secretary of state’s office between April and September to raise money for their businesses, though none have been completely funded.
Mark Shekerow’s Caregiver Communications in Atlanta is one of the 10. His 4-year-old company needs about $400,000 to build out its website, which pairs targeted advertising with articles about caregiving in an online magazine. The company is too small to attract venture capitalists, but Shekerow said crowdfunding gives him a chance to sell his idea to those who might be affected by it.
Shekerow is using SterlingFunder, one of several new Georgia funding platforms, to vet the residency of potential investors and organize his campaign. David Lilenfeld, SterlingFunder’s CEO, said most people still don’t understand exactly what crowdfunding is.
“Right now, I think we’re more an education company than an investment company,” he said. “People’s money is a very sensitive issue.”
Jenner Wood is leery of crowdfunding. Wood, the chairman, president and CEO of SunTrust’s Georgia and North Florida division, said his bank is in the habit of evaluating risk. Those who do not do that regularly are more likely to make poor decisions, he said. He also questioned whether unsophisticated investors would be able to spot fraud in the companies they’re betting on.
Plath, in North Carolina, had the same worry. He said lax regulation makes fraud likely. The state can verify the residency of investors or the amount a company raises, but a business is required to file its intent to crowdfund with the secretary of state’s office only if it wants to advertise the offering, a spokesman said.
“You’re certainly less likely to know the rules than someone who plays the game all the time,” said John Yates, chair of the technology group at the Atlanta law firm Morris, Manning & Martin.
Those who play the game all the time — accredited investors, individuals who are worth more than $1 million or make $200,000 or more a year — have long been able to invest in such early-stage companies. But the Georgia rule opens the option broadly for others.
Excessive regulation isn’t needed, Lilenfeld said, because investors should do their own research into a company’s business plan and executives before deciding to put their money into an idea.
They also should understand that if the company does well, it may be years before they can sell their shares or otherwise access the money again. And under the venture capital model, only one out of every 10 investments is considered a success.
“Those investors need to be smart and savvy and exercise good judgment,” Lilenfeld said. “Most startup companies fail and never return any money to investors. If they don’t understand that, they shouldn’t be investing.”
All investors, though, may not be looking for a return. The founders of SparkMarket, another local funding platform, said some investors may simply want to support the opening of a local restaurant, or encourage a company like Marietta’s Bohemian Guitar, an oil-can guitar-maker SparkMarket is hosting a crowdfunding campaign for.
“People are trying to sell crowdfunding as a way to get Facebook shares in the hands of the masses,” said Jeffrey Bekiares, SparkMarket’s chief operating officer. “That’s a dream.”
But people who invest in a local company may encourage friends to spend their money there, boosting its prospects. Grady Thrasher, founder of the platform CrowdVested, said companies that have other ways to raise money may use crowdfunding to get community support for their projects. And Megan Johnson, SparkMarket’s CEO, said the unique funding opportunity may lead companies to relocate to Georgia.
At least one already has. John Richardson, CEO and founder of renewable energy funder CleanArc Power, moved his company to Atlanta from New York to try to access crowdfunded money.
“I probably would want to stay,” he said. “You can’t just do this and pick up anchor and run. It’s a commitment to establish a base.”
Other states, like North Carolina, are considering similar rules. While it remains to be seen whether crowdfunding is widely adopted in Georgia, Bekiares said he expects strong results.
“It’s a fantastic opportunity to be a lab rat, in a positive way,” he said. “Georgia and Kansas have the opportunity to show other states why this works.”
WHO’S GIVING IT A TRY
These companies have registered with the Georgia secretary of state to raise money via crowdfunding.
Bohemian Guitar — Marietta
cMEcompete LLC — Atlanta
Novita Care Corp. — Cumming
Physicians Health Services — Dalton
SafelyStay LLC — Atlanta
Twitch Technologies — Savannah
CleanArc Power Inc. — Atlanta
Groundfloor Properties GA LLC — Atlanta
Atlanta Realty Income Fund LLC — Decatur
Caregiver Communications Inc. — Atlanta