The 1% might not be the only ones striking investment gold. Newly proposed intrastate crowdfunding legislation promises to open investment to the average income earner.
State Rep. Mike Villarreal (D-123), who chairs the House Committee on Investments and Financial Services, spurred legislative interest after Geekdom entrepreneurs RC Rodero de Mosier and Nathan Roach brought the idea to Villarreal’s attention.
Equity crowdfunding is an investment tool that allows a large number of unaccredited investors to gain equity in a startup for a lower cost than traditional investing. Each investor will only be allowed to donate up to $5,000, and investment revenue per start-up is capped at $1 million.
The site will require users to register and verify that they are Texas residents conducting business within Texas. Users will then be allowed to read profiles and comments from other investors, similar to how online shoppers can read reviews about a product on Amazon. The site will also help potential investors discern the stability of a startup and whether or not they can expect a long-term payoff or simply a supplement to their income.
Roach, who is helping to develop the website, hopes that this community feedback and wisdom of the crowd will help safeguard against potentially fraudulent startups.
The potential for investors to be duped by scams has been a cause of concern for some crowdfunding critics, as most new investors using crowdfunding are not likely to have a background in finance.
Villarreal hopes that investment and fundraising caps, as well as a month-long window of opportunity for investors to consider investing, will prevent new investors from becoming victims of fraud.
While crowdfunding will not see the same high stakes investment and payoff as investing on Wall Street, it could be a potential boom to the local community by growing small businesses.
“Crowdfunding really democratizes the marketplace, and it allows the little guy to discern what is a worthy investment,” Villarreal said.
Roach agreed and added, “It gives people a reason to be excited about investing in their community. You can see those investments come to life.”
Crowdfunding legislation initially gained notoriety in 2011 when the federal government passed the JOBS, or Jumpstart Our Business Startup Act. The law was intended to allow small business to receive more funding by easing securities regulations. However, the Securities and Exchange Commission (SEC) has yet to finalize these security regulations, preventing crowdfunding from being fully implemented on a national scale.
With bipartisan support from legislators Villarreal decided to do what the federal government could not.
“We’re taking matters into our own hands, so that we’ll at least be able to help ourselves,” he said.
The Texas State Securities Board, which has been instrumental in pushing crowdfunding legislation through, may be why Texas has been so quick to embrace this new fundraising method.
“They have a lot of authority to regulate these crowdfunding rules without the legislature having to go back and make adjustments every time,” Roach said of the Board. “In most states, the legislature has to pass laws confirmed by the securities commission, and there’s not always consistency and cooperation. In Texas, we’ve been hugely fortunate to have bipartisan support.”
Being a traditionally pro-business state isn’t the only reason that Texas may have a leg up on other states looking to approve crowd-funding legislation. The sheer size and diversity of Texas markets will allow startups to have more access to investors than a smaller state with a lower population.
Kansas, for example, passed crowd-funding legislation in 2011 but has only seen the rise of 10 successful startups in three years.
While new crowdfunding sites make investing more accessible, opportunities may be lost on older generations or anyone averse to using technology.
“Certainly this is a sign of our changing times. This is something that will be available for anyone savvy enough to get online,” Villarreal said, adding that he believes a variety of startups, not simply in the technology industry, will benefit.
Strategically placed Internet advertising, as well as social media outreach, will be among some of the strategies employed by Roach to spread information about Hive Equity crowdfunding to first-time investors.
This type of fundraising has grown in popularity largely because of social media, allowing projects and ideas to be easily shared around the world.
Kickstarter, a crowdfunding website, famously helped an investor named Zack Brown raise $55,492 to make potato salad, which he began as a joke. Brown’s joke garnered national attention and spurned criticism from those who believed crowdfunding could not be a legitimate tool for investment.
Indiegogo and GoFundMe have also been among the more popular crowdfunding sites but are largely donation-based. Texas’ new equity crowdfunding legislation will allow investors to see a greater potential for return on their investments by allowing them to own a stake in their startup of choice.
The Texas State Securities Board will finalize crowdfunding regulations on Oct. 22, and the legislation will go into full effect by the end of November.
*Featured/top image: Rep. Mike Villarreal with the Hive Equity team at Geekdom during a press conference. Courtesy photo.