Bill would open door to 'crowd funding,' loosen regulations for many to invest in small ventures

A fundraising tactic that has been employed for some time now by artists and entertainers -- namely securing small-dollar financial backing for projects from large numbers of donors -- may become equally commonplace among entrepreneurs if the U.S. Senate approves a bill to allow "crowd funding" for startups and small businesses.

Earlier this month and with overwhelming bipartisan support, the U.S. House of Representatives passed the the Entrepreneur Access to Capital Act by a vote of 401-17.

The measure, which now goes to the Senate, had the support of all nine Tennesseans in the House, including Memphis Democrat Steve Cohen.

"This will open up financing for small companies in ways that before might have been prohibited," Cohen said. "I see no reason why the Senate wouldn't take it up and pass it. This is a very popular bill with remarkable bipartisan support."

In short, the bill would allow entrepreneurs to finance startups and small businesses by crowd funding -- bankrolling their endeavors by soliciting donations through online sources without having to comply with many federal restrictions or register with the Securities and Exchange Commission.

The act paves the way for entrepreneurs to accept money and offer unregistered securities in their startups of up to $2 million. Individual investments would be capped at $10,000 per investor or 10 percent of the investor's annual income, whichever amount is lower.

The concept mirrors a money-raising strategy that's become increasingly popular for cash-strapped performers through online sites such as kickstarter.com.

Employing a similar strategy a couple months ago, Memphis musicians Harlan T. Bobo and Jack "Oblivian" Yarber strummed what was for them an unfamiliar tune: Asking fans to help fund an upcoming 40-city European tour via donations through kickstarter.com

But the social media campaign succeeded and in a matter of weeks the rockers had raised %246,108 from 74 contributors, surpassing their original goal of $6,000.

In return for their donations, which ranged from $5 to $200 each, fans could receive "Our gratitude and thanks" (for the $5 donors), as well as tour T-shirts, free downloads and autographed merchandise for those who chipped in a little bit more.

Bobo and Yarber's strategy paid off. Whether a similar approach will work for a startup is another matter.

"A big gap exists in Memphis between entrepreneurs and funding and this has the potential to close that gap," said Gwin Scott, president of EmergeMemphis.

"My concern is that while this may open some doors, I'm not certain that it will produce smarter money and more strategic dollars."

In other words, let the buyer -- or investor -- beware.

That's why some state securities regulators have expressed concern about the bill, worrying that the federal government's move exposes small investors to much greater risk.

That's a potential downside to the bill that Cohen acknowledges and urges potential investors to take note of.

"There may be some bad experiences because there are dishonest people out there," Cohen said.

"Investors need to make sure they know what they're getting into."

Jan Bouten, a partner at Innova, agreed.

"I think this can be a good thing if it's done well because there are so many great ideas for startups that don't qualify for traditional financing," Bouten said. "As much as I welcome it, though, I also realize that if this goes through then there will be a lot of heartache in a couple years because the fact is, most startups fail.

"I worry that some investors may not fully realize that and they'll get a rude awakening when they lose their money."

Ultimately, the motivation is to spur entrepreneurship across the nation, create jobs and stimulate the economy, Cohen said.

And that's a plan the leaders at Gov. Bill Haslam's Startup Tennessee entrepreneurship initiative heartily endorse.

Startup Tennessee"With the initial passage of the Entrepreneur Access to Capital Act, we welcome the well-deserved attention on supporting these types of companies," said David Warren, director of operations at Startup Tennessee.

"Access to capital, specifically seed-stage capital, is one of the most difficult hurdles for entrepreneurs. We value initiatives that promote and facilitate funding for high-growth potential startups, while appreciating the cautiousness necessary in maintaining the integrity of what defines an investable business."

-- James Dowd: (901) 529-2737