Tapping the crowd for funds gets easier

Dick Kelsey had been keeping a close eye on a Congressional proposal to make it easier for young companies to raise capital, and his Reno-based SunScience Corp. had a pitch ready for investors less than two weeks after President Obama signed the measure into law.

SunScience last week began offering shares directly to the public to raise money for development of its software to manage renewable energy systems.

The company's offering to the public shares at 50 cents each, with a minimum investment of $5,000 wouldn't have been possible before a bipartisan vote of Congress and the signature of President Obama approved the Jumpstart Our Business Startups (JOBS) Act.

Observers of entrepreneurial activity in northern Nevada say that while SunScience appears to have been the first in the region to take advantage of the new law, it's unlikely to be the last.

The new law allows young companies such as SunScience to raise up to $50 million without registration with the Securities and Exchange Commission and allows them to have up to 1,000 shareholders without registration. That's double the number of investors allowed previously.

"It's a huge deal for a company such as ours," says Kelsey, president and chief executive officer of SunScience.

Founders of small companies traditionally relied for financing from families and friends. The SEC tightly regulated raising money from outside investors, limiting the sorts of investors who could participate and all but forbidding companies from promoting themselves while they searched for capital.

Kelsey and James Parker, the chief technology officer of SunScience, consistently bumped into those restrictions as they raised capital for the new company during the past 30 months.

The company has developed a controller system that's used in applications ranging from a solar-energy greenhouse near Lovelock to portable disaster-relief systems.

While the JOBS Act loosens some of the regulations around public financing of startups, Kelsey says SunScience expects to follow most of the same rules audited financial statements, for instance that govern traditional publicly held companies.

David Garcia, a partner at the law firm of Holland & Hart, says entrepreneurs in the region have taken special note of the provision in the law that allows them to publicize plans to raise capital from well-heeled investors.

Current law doesn't allow publicity or advertising, which creates difficulties for entrepreneurs who want to link up with investors.

Entrepreneurs in the region also are interested in the crowd-sourcing platforms Web sites that would tap hundreds or thousands of investors to fund startups that will be allowed under the new law.

"There certainly is a lot of buzz about what kinds of opportunities this will create," Garcia says. But he cautions that much depends on the rules that federal regulators will be writing in the next few months to put the law into motion.

The ability of startups to tap a wide market of investors is likely to be particularly useful in a region such as northern Nevada with weak networks of angel investors and venture capitalists, says Dave Archer, president and CEO of Nevada's Center for Entrepreneurship and Technology.

"It's easier to find 500 people to put in $100 each than it is to find one person to put in $50,000," Archer says.

And investors who have only a small stake in a company probably will need less management attention that folks who are worried about the day-by-day progress of a big investment, Archer says.

The JOBS Act is a natural progression from the crowd-funding Web sites that have generated capital in recent months for all sorts of startups, says Debe Fennell, a Reno-based partner in CrowdFundingLive. The company runs educational events about crowd-funding and is putting together a crowd-funding Web site that targets projects developed by women.

Because SEC regulations haven't allowed equity investment through crowd-funding sites, existing sites have created a barter system between donors and recipients.

Reno songstress Mel Kennedy, for instance, raised $5,510 in contributions through the crowd-sourcing site Kickstarter.com to record a CD.

Because she was raising contributions rather than investments, Kennedy offered backers autographed copies of the CD and offered free concerts for her biggest donors.

Some crowd-sourcing deals on Kickstarter have failed to gain momentum.

Reno-based 2Word Software, which is creating a game based on Christian values for mobile devices, sought to raise $50,000 on Kickstarter this spring. It raised only $1,500.

Randy Pease, a founder of the company, says Kickstarter apparently works best for companies that either have much of their capital in place and are looking for crowd-sourcing to bridge the gap. Another use of the site, he says, is building buzz around a new product.

For now, 2Word Software is turning to more traditional financing a potential strategic partnership with another games company to get its product to market.

While crowd-sourcing has grown as a vehicle to fund startups, Fennell says regulators worry that the largely ungoverned sector will draw scam artists or result in big losses for pools of naive investors.

"People are going to get more and more careful about how their money is used," she says.