National crowdfunding rules open new avenues for investors, companies

Advocates conceived crowdfunding as a platform through which everyday investors could enjoy the benefits of formal equity and debt investments without needing hundreds of thousands of dollars to participate.

Michael Dickson, Antonio Madrid and Will Steakley conceived The Native hostel as a place where everyday travelers could enjoy the best of the Austin cultural scene without ponying up hundreds of dollars a night to afford it.

Little wonder, then, that they saw crowdfunding as a way to raise money for their project. They liked the idea that someone who stays there because it only costs about $50 a night might also be able to help fund its creation.

“Maybe one in 100 people who stay here would be accredited,” with enough wealth or income to qualify for traditional investments in these types of offerings, Dickson said. “This allows us to raise from people who would be our clientele.”

As of mid May, when federal crowdfunding rules went into effect after years of delays, the folks at The Native and other small companies could go through registered portals to garner debt and equity investments from people around the country.

The Financial Industry Regulatory Authority, or FINRA, had approved 11 national portals as of this past week, according to its website. Three of those are based in Texas.

For companies, the new rules open a new avenue to raise money, including in small batches, from investors throughout the country. For investors, it provides an opportunity to put money into the riskier but potentially higher-return growth investments in startups and other firms around the country.

Prior to May, such non-accredited investors – those who didn’t meet certain wealth or income thresholds — could only participate in state-based equity- and debt-crowdfunding platforms. Those rules, including a set promulgated by the Texas State Securities Board, confined offerings to in-state companies that raised money from in-state investors.

Despite the geographical restrictions, the so-called intrastate crowdfunding platform in Texas showed signs of success. Since the state’s first portals went live in February 2015, firms in the state have raised almost $1.9 million, according to the latest data from the state securities board.

To date, 35 companies offered securities through registered Texas portals, hoping to raise as much as $10.8 million collectively. Fifteen of them have hit at least their minimum target, and seven of them hit their maximum, the state data show.

Southwest Online News has set the highest target to date, launching a $1 million crowdfunding campaign on May 2, according to the securities board data. State laws cap each company’s crowdfunding at $1 million a year.

The largest successful offer to date — at $440,800 — went to Chapman & Kirby, a planned “gastrolounge concept and premium event space,” according to an online description of the offer on NextSeed, a crowdfunding portal.

NextSeed is one of a handful of approved and active Texas portals and one of the state’s most successful to date. It has more than 2,000 members who have invested about $1.2 million as of early June, said Eugene Kim, the firm’s vice president of product.

Companies have paid out more than $90,000 to investors, who on average have made about two investments apiece, Kim said.

And NextSeed built off that success and its portal technology to become one of the first nationwide portals approved by federal regulators. According to its interstate portal, The Native hopes to raise at least $275,000 there.

“It was relatively easy for us to put up a national platform, because we already had the infrastructure,” Kim said. “We had essentially the same architecture and just layered on features relevant to the federal rules.”

National vs. state rules

The state and federal regulations have advantages and disadvantages. The Texas rules, for example, cap investments by non-accredited individuals at $5,000 per offering, but they don’t limit how many separate deals they can fund.

The federal rules have an annual cap on all investments by non-accredited individuals, starting at $2,000 and sliding higher based on wealth or net income.

“It’s a bit of a complicated formula, but suffice it to say you can invest less nationally,” Kim said. “If you’re focused on people in Texas and (the company) can raise more per deal,” then a Texas portal might work better.

On the other hand, the national rules do away with some of the tighter in-state controls on what a company can say and where it can say it. A company raising money through a Texas-only portal can’t provide as many details, Kim said, and it might have to restrict its social media outreach.

“I feel that listing on the national platform doesn’t preclude you from raising money from local investors and enjoying the benefits of having a local fund raise,” Kim said, noting that NextSeed plans to operate both portals for the foreseeable future. “Those people are going to show up anyway.”

Madrid and Dickson declined to discuss details of their offering, citing regulations that limit what companies can say about active deals. But during a recent tour of their property at the corner of East 4th Street and the northbound I-35 access road, they sketched out their vision of a hostel that blends both locals and visitors.

If all goes to plan, the 12-room, 72-bed hostel will give travelers a taste of Austin’s local culture, but the planned restaurant and café, which can accommodate live music and other events, are designed to draw a mix out-of-towners and natives.

Ultimately, Dickson said, they hope The Native becomes a place where visitors can see “what Austin has been and what it should be.” To do that, they hope to create a boutique hotel experience at about $50 a night.

“St. Cecelia is so culturally significant, but it’s so expensive,” he said. “We want to offer that experience to our friends and folks in the cultural community. … That space doesn’t exist here.”

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