Should Equity-Based Crowd Funding Be Legal? - Wall Street Journal

Small businesses complain that they're starved for capital these days. And there's a debate raging about a possible solution under consideration by Congress: equity-based crowd funding.

The Wall Street Journal

Supporters of the idea say the Securities and Exchange Commission should lift the current limits on private-equity investments and let companies sell stakes to crowds of investors online. Millions more people would be able to buy stakes in companies, proponents say, opening up a potentially huge source of financing. The investors would also have a powerful incentive to become customers of the companies they've backed.

Opponents, however, say the practice is fraught with risks. Poorly informed investors could easily lose their money betting on companies that haven't been thoroughly vetted; they might also get stuck with stakes they can't easily sell, or find themselves saddled with tax liabilities. Companies that turn to crowd funding, meanwhile, would lose out on the chance to get guidance from seasoned angel investors.

By Dave Lavinsky

Funding is the lifeblood of any small business. And it's getting tougher to find these days. Banks have become more vigilant about lending, and the vast majority of venture and angel funds are reserved for tech companies with big growth potential. The result is that far too many entrepreneurs can't start or grow their ventures—and can't provide jobs and new products and services to spur our economy.

Letting small companies sell equity stakes online would be a huge boost to those firms—like angel investing on steroids. The businesses would get access to tens of millions more potential investors, and could reach out to them at little or no cost through online outlets like Facebook. Then, if the companies won funding, they'd get a built-in base of customers who were strongly motivated to help the brand succeed.

Broadening the Base

Currently, equity-based crowd funding falls under strict Securities and Exchange Commission rules governing angel investing. That hinders broad-based online fund raising in a couple of ways.

Paul Gerben DAVE LAVINSKY: Letting small firms sell equity online is 'angel investing on steroids.'

First, the SEC largely limits private-equity investments to accredited investors—those with $1 million or more in net worth, among other tight standards. Only 35 nonaccredited investors are allowed to buy private equity in a company's offering. Second, the SEC prohibits general solicitation or advertising of the equity being sold. Unless the entrepreneurs or small-business owners have a pre-existing relationship with the angel investors, they can't try to sell them equity.

If equity-based crowd funding were legalized under the current proposal, those two limits would go away. So, entrepreneurs and small-business owners could target a much wider range of investors—say, for the sake of argument, the 51.7 million U.S. households with household income of $50,000 or above. And they could reach out to potential investors through venues like social networks that cost basically nothing and provide a global reach.

Raising money from a crowd provides other powerful advantages to companies. If a company raises crowd-funding money, it implies that there's real demand for its offerings. If not, most likely there's no demand, and an entrepreneur is spared the opportunity cost of starting the business (and then seeing it fail).

Likewise, equity-based crowd-funders are more likely to become loyal customers, as they have a vested interest in seeing the company succeed.

Crowd funding holds a big advantage for the funders, as well: It lets them participate in angel investing, whose returns have outpaced every other significant asset class over the past decade.

A Guiding Hand

Critics raise lots of objections to the idea. For one, they say companies need the help that seasoned investors can bring. But if companies need guidance, they can take on experienced managers or a board of directors. And raising money from a crowd initially doesn't preclude getting angel investments down the road. Lots of companies launch with credit cards, for instance, then make a name for themselves and catch the attention of angels and venture investors.

Further, critics argue that if companies must raise funds from a crowd, there are better ways to go about it, such as soliciting donations or raising debt capital instead of equity. But there isn't a strong enough inducement for people to donate; even if you offer them some reward, it won't be as enticing as equity. As for debt capital, there's a potential problem: It doesn't allow businesses the grace period they need to start building the company. Instead, they'd have to start paying it back right away.

Critics also see red flags for the investors. Among other things, they argue that crowdfunded companies won't be as carefully vetted or transparently documented as traditional ones. So, they say, lots of companies looking for money will be particularly risky bets for investors—if not unscrupulous operators that solicit funds and then vanish.

What's more, critics say, equity in privately held companies is nearly impossible to sell, except when the company itself is acquired. This may take many years, or never happen at all.

These concerns have merit. The answer, as with any investment, is common sense: People need to be aware that they may very well lose their money. They should do as much research as possible and protect themselves by holding a portfolio of investments, not staking everything on one company.

That approach will become more viable as more crowd-funding platforms are built and it gets simpler to track down investment targets. Those platforms will, hopefully, also introduce safeguards against fly-by-night fraudsters, such as background checks for entrepreneurs and business owners who solicit funds.

None of those concerns are a reason to block equity-based crowd funding. Whatever the risks of the approach, the economic effect it can have on America is much more profound.

Mr. Lavinsky is president of Growthink, a business-planning firm and investment bank. He can be reached at reports@wsj.com.

By John M. Torrens

On the surface, crowd funding sounds like a good idea—letting companies tap into a new source of funds and giving average people new opportunities to invest. But it creates problems for people on both sides of the transaction, and there are better ways to get capital into the hands of entrepreneurs.

Stephen Sartori, Syracuse University JOHN M. TORRENS: 'There are better ways to get capital into the hands of entrepreneurs.'

Let's start with the problems it brings to investors. When average citizens buy traditional stocks, they have access to audited financial statements and disclosures, and they can sell their shares to a market of buyers at any time. Investing in a small business as a member of the crowd gives the investor none of these things.

The proposed law would not require audited financials on capital raising under $1 million, meaning people in the crowd could buy something that's valued based on potentially flawed numbers. And there could be hidden liabilities—such as workers' compensation claims, lawsuits and back taxes—in the company that the crowd now owns.

And the crowd would be stuck with those problematic holdings, since there's basically no way to sell the investments. They're about as illiquid as you can get.

From the entrepreneur's perspective, meanwhile, equity-based crowd funding raises just as many problems.

Let's start with a basic issue: Yes, small businesses need capital. But they need a lot more than that. And by focusing simply on capital, equity-based crowd funding would rob small companies of access to everything that traditionally comes with capital.

Investors, for instance, often bring industry experience, market intelligence and a valuable contact list. Everyone's money is green, but it's what comes with the money that is often more important. By selling equity through crowd funding, an entrepreneur could be stuck with a crowd of investors who may not know anything about the market or industry—or investing, for that matter—and may bring no other value.

Instead, that crowd of investors could bring a whole host of new problems that were never contemplated. For example, managing investor relations and communications with a larger number of potentially unsophisticated investors will take time away from running the business, making sales and executing on strategy. Not to mention the potential legal and tax ramifications that will need to be addressed.

Turning to Angels

An entrepreneur is better off raising larger amounts of money from a single angel investor with experience and connections than trying to hunt down smaller amounts from many investors with nothing to offer besides the money. Angel investors understand how to value companies, have the liquidity to make investments, and often have the experience and connections to help the new venture make the most of the investment.

Of course, as proponents of crowd funding say, companies with low growth potential are generally not good candidates for equity capital. Angel investors look for innovation, scalability and a team that can execute, and many small businesses simply aren't in that category. Even if equity-based crowd funding is legalized, angel investors will continue to get access to the best small-business investment opportunities while the crowd picks over the rest.

But that's precisely the point: Many of these companies are not good candidates for equity capital—either from angel investors or crowds. If angel investors have passed them by, there's probably a good reason. But those reasons may not be apparent to unsuspecting crowds.

Better Options

For small businesses that don't attract interest from angel investors, there are other options available that are better than crowd equity. For example, they already have access to crowd-sourced capital, but they don't have to trade equity for it. There are several popular crowd-funding sites that help entrepreneurs raise money through donations. This connects a funder's desire to make a difference to the entrepreneur's need for capital without diluting ownership or creating future problems.

As another alternative, we could craft policy that would make it possible for the crowd to step up and provide debt capital where banks will not. For the business owner, debt is ultimately less expensive than equity, and it solves the problem of raising capital without all the hassles of taking on shareholders. People in the crowd benefit by earning interest at a higher rate than they would get on a bank deposit, while participating in a company for which they have a passion.

An entrepreneur with a truly innovative, scalable business opportunity will still have to work hard to access capital, but there is no doubt that it is out there. Crowd equity does not fill a gap in the capital market, but rather it creates more problems for small-business owners, as well as for the crowd.

Dr. Torrens is a professor of entrepreneurial practice at Syracuse University's Martin J. Whitman School of Management. He can be reached at reports@wsj.com.

View the original article here

Top 10 Business Issues with Legal Implications 2012

TORONTO--(BUSINESS WIRE)-- In a constantly changing regulatory and business environment, it can be difficult for businesses to keep up. And 2012 will be no exception — both domestic and foreign investors will face challenges and meet opportunities doing business in Canada. From the evolving class action lawsuit to changing Aboriginal consultation requirements and a harder hitting tax man, Borden Ladner Gervais LLP (BLG) predicts the issues likely to impact the corporate landscape and dominate headlines in 2012.

1. Keeping the spark alive – Ensuring foreign investors keep coming back for more

Canada’s North was an alluring target for international development companies in 2011 and in fact in October, Fortune magazine ranked Canada No. 1 in its annual look at the Best Countries for Business. Significant investment in the natural resource sector represented a boon for the Canadian economy but our international partners faced Canada’s Aboriginal consultation requirements and environmental regulations. What can foreign investors and Canadian natural resource companies do to mitigate red tape and keep these vital projects on the move?

2. Financial institutions and the economic recession – It ain’t over ‘til it’s over

Canada weathered the global recession better than other industrialized countries thanks to our banking system. Not one of our banks required a bailout, our economy grew 3.1 per cent in 2010, and we saw more foreign investors seeking Canadian capital and wanting to do deals. Sounds like we’re in the clear! On the contrary. Some say low interest rates, banks spreads, insurer liabilities and pension plan funding could create challenges for Canadian banks and insurers in 2012. How will banks and big businesses cope?

3. We can’t predict what the plaintiff class action bar will do next, but at least we can prepare for it

Class action lawsuits kept companies busy in 2011 as this type of lawsuit continued to develop and spring up from every angle. Some companies had incredible success, others were engaged in lengthy trials and others faced certification hearings. From securities to privacy to product liability, it appears that class actions will continue to attract corporate attention in the coming year. Development south of the border may limit the scope of the class action in the United States, but companies operating in Canada will want to follow a series of decisions to be released in Canada in the next 12 months to understand the risk facing their organizations.

4. You can’t run or hide – why you must turn and face the tax man in 2012

After cutting taxes in many countries to boost economies, governments around the world are doing what they can to recover revenues lost during the recession. Canada is no exception and businesses are seeing more frequent and aggressive tax audits. While Canada Revenue Agency has been actively pursuing audits on high net worth individuals for more than a year, companies will now face even greater scrutiny. From grading on non-compliance to assessments of reporting functions, Canadian businesses will feel the heat of the tax man in 2012.

5. Privacy in public forums – will we ever recover?

It seems like a lifetime ago that we dialed up the Internet, sat through the beeps and whirs and patiently waited for pages to load. What did people do before the Internet and the World Wide Web? For one thing, they maintained their privacy. 2011 brought the launch of facial recognition for Facebook users in the U.S., high-profile cases of defamation liability via Twitter, and job loss for some Vancouver rioters whose photos appeared online. With the terrain changing so rapidly, how will web users protect their privacy in 2012? What will be the effect of: anti-spam legislation, new advertising guidelines for online tracking, evolving rules surrounding Internet/social media defamation, and employers finding out more and more about their employees' antics outside of the workplace?

6. What the frack?

While large-scale commercial production of shale gas has not yet been achieved in Canada, many companies are now exploring for and developing shale gas resources in Alberta, British Columbia, Quebec, and New Brunswick. But fracking – the use of highly pressurized fluid to fracture rock and release gas and oil from shale fields – is increasingly controversial. However, in the U.S. alone, fracking is responsible for increasing recoverable resources by 600 trillion cubic feet of gas and seven billion barrels of oil that would not otherwise be accessible. What changes to regulation and legislation are expected in response to community concerns? What direction is Canada going with respect to greater oversight and required consultation?

7. One for the history books: Social media mobilizes civil rights

Around the globe, 2011 will be a year to remember in terms of civil rights activists and political regime protesters using social media to build engagement and mobilize crowds. In fact, Time magazine even named “The Protester” as 2011’s Person of the Year. What have we learned from these movements and what can businesses do to protect themselves should a protest movement take place at their front door?

8. Saying sorry without fear of litigation? Apology legislation becomes more prevalent

Thanks to apology legislation, businesses in Ontario, British Columbia, Saskatchewan and Manitoba are more likely to come out of a crisis on top. Not only does this legislation allow businesses to express empathy for those affected by a situation, but there is growing evidence that apology laws actually reduce the number of lawsuits and the time required to settle them.

9. Overseas growth sounds attractive. But what about the tax authorities?

International trade and overseas expansion have never been more attainable for Canadian businesses. With continued scrutiny of transfer pricing arrangements, however, businesses must be prepared to meet the reporting and filing requirements of the relevant tax authorities. At the same time, growing businesses should be aware of the expanded exchange-of-information tax treaties and how these multi-jurisdictional relationships can contribute to profitable growth.

10. Canada’s green economy: Set to stay the course?

When it comes to the business of renewable energy, Canada is considered a land of opportunity. Favourable pricing and incentive programs have attracted international attention and foreign investment. But in 2011, the provincial government faced much criticism over the Ontario Green Energy Act, the FIT program and renewable energy prices in general. The Green Energy Act will remain under the microscope in 2012 as investors, consumers and governments examine the value of this program and the unconventional process of enacting it. How will this impact Canada’s role in the global renewable energy space, the opportunities presented to Canadian and international companies, and the Canadian economy?

About Borden Ladner Gervais LLP

With more than 750 lawyers, intellectual property agents, and other professionals working in six major Canadian cities, Borden Ladner Gervais LLP is the largest Canadian full-service law firm focusing on business law, litigation and intellectual property solutions. BLG provides services in virtually every area of law, and represents a wide range of regional, national and multinational organizations. For further information, visit blg.com

Calgary | Montréal | Ottawa | Toronto | Vancouver | Waterloo Region
Lawyers | Patent & Trade-mark Agents | Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership.
blg.com

View the original article here

Prepaid Legal Business Opportunity

Millions of North Americans are searching for an opportunity; an opportunity to change their lives.
Some are looking for time and money...
Some are looking to make a difference...
Pre-Paid Legal is changing the way legal services are delivered in North America, and you can be a part of it. You can make a living while making a difference.

View the original article here