Weighing in on the new equity crowdfunding rule

In Texas, crowdfunding has been taken to a new level. Recently, the Texas State Securities Board passed a ruling to allow any resident, regardless of net worth, to invest up to $5,000 in companies via equity crowdfunding.

Before the ruling, only “accredited” investors with high net worth and income levels could buy equity stakes in companies. Now, anyone with Internet access can be a venture capitalist and invest in startup companies in Texas.

“I think it’s going to make a tremendous impact,” said Robert Hoskins, owner of Front Page PR, which specializes in crowdfunding promotion. “There are 20 million Texans who can invest up to $5,000 per deal.”

Hoskins believes equity crowdfunding will allow startups and small businesses with great ideas to get access to capital more easily. In his opinion, the new ruling will spark investment and drive economic development in Texas.

“It will be much easier to get money through crowdfunding than going to a bank,” says Hoskins. “The money is going to make people’s creative juices flow.”

However, not everyone is convinced that equity crowdfunding will make such a huge impact on the Texas business community. Dr. Mike Davis, an economist and finance professor at SMU, is a bit skeptical about whether it will ever become a popular way to invest. “I’m just really suspicious,” he says. “I just don’t know what the value proposition is.”

Davis thinks that it will be rather difficult to convince people to invest up to $5,000 in companies that they find online. “All I need is for those 20 million people, every one of them, to give me a nickel… Then I’d have a million bucks,” says Davis. “But I can’t get them to do that, so why should I expect them to give a company $5,000?”

Hoskins, however, thinks the connectivity of the Internet will calm the fears of those who may initially be scared to invest. “You have the Internet with the ability, through a crowd, to help vet deals,” he says. “That’s never been possible before.”

Hoskins did acknowledge that investing in startup companies can be extremely risky, with the majority of them failing after only a few years. But, he still thinks that someone armed with the right knowledge can be successful.

“It is kind of like gambling,” he says. “But if you’re a smart gambler, you do your research. You learn how to vet deals.”

Dr. Nathan Walcott, a finance professor at Southern Methodist University, is mostly concerned with the credibility of a company that chooses the equity crowdfunding route. He warns potential investors that a company seeking capital through equity crowdfunding may have already been rejected somewhere else.

“The companies that can’t get venture capitalist funding might have to resort to [equity crowdfunding],” says Walcott. “There might be more risk.”

Despite his skepticism, Walcott does think a legitimate market for equity crowdsourcing can develop. Venture capitalist firms, like Sevin Rosen Funds in Dallas or Silverton Partners in Austin, typically search for companies that could have massive growth and IPO in a few years, but not all companies fit that profile. Some companies may have perfectly good business models and just need some additional financing, but venture capitalists will turn them down because they lack extreme growth potential.

“There are some gaps in financing,” says Walcott. “I think this new way of raising money could be a good thing for some businesses and investors.”

According to Hoskins, investing via equity crowdfunding just might be a place to have fun. He says many investors will view crowdfunding as a form of entertainment, similar to the lottery, and its popularity can grow because of its advantages over other forms of entertainment.

“The odds are going to be a lot better than playing the lottery,” he said.

Chris Warley
cwarley@smu.edu

Chris Warley is a junior at SMU from Atlanta, Georgia. He is a double major in finance and journalism and will begin his career in investment banking upon graduation.