Effective today, non-accredited investors are now able to invest in start-up companies looking to raise up to $1 million annually. Until now, such venture capitalism was resigned to the financial elite — accredited investors, those bringing in an income of at least $200,000 a year with a net worth of $1 million. But as a provision of the 2012 Jumpstart Our Business Startups (JOBS) Act, the doors have been opened to the Average Joe who might be looking to take a stake in a privately-held upstart company.
The food and beverage industry hasn’t been one to shy away from crowdfunding models to date, either via donations on sites like Kickstarter or investment platforms like CircleUp. So on Monday, BevNET and Project NOSH spoke with a handful of food and beverage investment experts on what effects the new crowdfunding rules will have on the industries.
Rory Eakin, the co-founder and COO of equity-based crowdfunding platform CircleUp, said that while he advocates for the concept of creating a more open, inclusive investing marketplace, the existing crowdfunding rules as they’ve been established will likely be more burden than benefit to entrepreneurs.
“It’s going to be a lot more expensive, complex, and uncertain, relative to the historical ways of raising capital with accredited investors,” Eakin said.
Eakin pointed to new rules that would require companies to conduct financial reviews from outside auditing firms – something companies raising money on CircleUp are not required to do.
“In the long term it does open up more participation but there’s a lot of work that needs to be done to make it attractive to the best entrepreneurs,” Eakin added. “It needs sensible regulation.”
There’s also the fear that weak companies might fizzle out soon after taking on capital from investors who might themselves be less than financially secure. Michael Burgmaier, Managing Director & Co-Founder at Whipstitch Capital warns nonaccredited investors to think carefully before investing. “It’s not monopoly money,” he noted to BevNET.
That said, he does see a place for equity crowdfunding, especially with early-stage brands.
“Everyone says ‘well it’s a friends and family deal’ for companies early on,” Burgmaier notes. “Not everyone has friends and family that can write checks up to a million dollars to help them. In some ways, it can help democratize the early stage startup phase.”
While in theory equity crowdfunding might work, Jeremy Halpern, a partner at the law firm Nutter, McClennen & Fish LLP and Managing Director of food and beverage angel investing group Edible Ventures Group, thinks that for most verticals, the new regulations won’t benefit either deal party.
This risks for entrepreneurs, in Halpern’s opinion, can be just as great because they may result in long term damage to their reputations and hurt future investment opportunities.
“[Food entrepreneurs] often way overvalue their idea. They think their idea is so unique and no one else has ever thought about barrel aging a whatever. One of the things portals are going to do is actually increase the transparency,” Halpern said. “You’re going to put it on and find out there’s 30 other rums that added turmeric to their rum.”
In part because of this plethora of products, Halpern believes that the sheer number of deals on platforms will cause an issue he’s deemed “the app store” effect. The deals that initially raise the most money (whether organically or by seeding their raise in advance) will quickly rise to the top, while the 900th deal will be left to languish.
As an angel investor, Halpern would see a brand that has raised money through equity crowdfunding as a red flag for his own investment. His concern is that many investments don’t pan out and nonaccredited investors aren’t prepared for that.
“The other risk I don’t need is a bunch of small fry investors… who create additional litigation exposure,” Halpern says. “Because the reality of professional investing is that a bunch of your deals are going to fail…and nonprofessional investors are going to kick and scream and throw a fit and potentially sue everybody in sight.”
Halpern is not entirely sure the new platforms are even needed. “The problem is that they’ve assumed this thing, it’s an immense hubris of assumption, that there are investors sitting out there who are dying to spend their free time trolling through websites looking for deals.”