It’s been nearly a year since companies selling private stakes to outside investors could legally advertise their capital needs on websites, radio and other mediums.
But securities filings and other data reviewed by the Hartford Business Journal reveal the Internet and other marketing platforms — so far — haven’t magically produced capital fledgling startups are seeking.
While several big Connecticut insurance and investment firms have filed regulatory papers with the U.S. Securities & Exchange Commission claiming the new exemption that allows them to advertise their capital needs, few appear to be doing it.
And crowdfunding websites — which match startups with investors via the internet — have largely not delivered, at least for the several dozen Connecticut companies that have solicited online investments within the last year.
Meanwhile, startups in the technology hubs of Silicon Valley and New York City have seen far more success raising funds online.
Signed into law in 2012, the federal Jumpstart Our Business (JOBS) Act paved the way for equity crowdfunding by eliminating a long-time ban that restricted private firms from publicly advertising their capital needs to investors.
Such investments — which don’t require businesses to divulge financial metrics like a publicly-traded company — have long been privately advertised through brokers and other professionals to accredited investors, or individuals with a net worth of $1 million or who make $200,000 per year.
While companies trying to raise money can now advertise it publicly, they are required to take steps to ensure that individuals who invest are accredited.
Crowdfunding bust
Ray Leavitt IV, CEO of Stamford-based EvoLux said he had high hopes that the Jobs Act would empower startups like his.
EvoLux is creating an Uber-esque web and mobile platform that would allow users to book and pay for a helicopter flight.
The company has raised $400,000 in seed financing and grant support from the state and other outside investors, including helicopter maker Sikorsky, and has signed up 23 helicopter operators in the Northeast and Florida to help launch a beta version of its product.
With those credentials, Leavitt thought EvoLux had a decent shot of securing crowdfunding investment. He listed his company’s capital needs on several websites, but hasn’t been able to secure a dime, he said.
“I was skeptical but I thought it was going to work,” Leavitt said, adding that few online investors seemed serious about doing deals. “I thought we were one of the best companies on there.”
Leavitt’s company isn’t alone. Nearly all of the 20 Connecticut companies that listed equity offerings on websites such as Angel List and EquityNet have raised little to no money, even though some of them have previously secured investments through more traditional means, according to data provided by crowdfunding aggregator Crowdnetic.
Leavitt said he has mostly given up on checking his company’s profile on crowdfunding sites. Instead he’s been meeting in-person with angel investors, most of whom have shied away from crowdfunding, to negotiate a $1 million investment round.
“Once we raise $1 million, the hard part is over,” he said. “There would be no point to online crowdfunding.”
Some industry observers think crowdfunding could catch on if federal regulators allow unaccredited investors to get in on the action, but the SEC has not yet released regulations to allow it.
Michael Caldwell, CEO of Norwalk events-entertainment booking website Gigmasters.com, said his company recently raised $1.3 million through traditional means, but he likes the idea of using crowdfunding in the future. He thinks the 38,000 entertainers and contractors in Gigmasters’ network would be a perfect target audience.
“There’s something organic about opening up investment to our own members,” Caldwell said. “There’s something about it that really resonates with me.”
But Caldwell admits he will probably have to wait until the SEC opens up crowdfunding to unaccredited investors.
And, any new investors would need to be approved by his current equity stakeholders.
“I’m convinced it’s going to gain steam,” he said. “I’ll have to sell it to the partners.”
Angel investors are cautious penguins
Ed Goodwin, president of the Connecticut Angel Investor Forum, said he isn’t surprised online startup profiles are collecting dust on crowdfunding websites. He has looked at the sites, and even met with executives from some of them, but he doesn’t know any fellow angel who invested through those platforms.
Goodwin said most angel investors are wary of being “the first penguin to jump off the ice flow.” Getting involved in investment deals with people they don’t know could bring liabilities and risks down the road. Having a crowd of investors to deal with may also turn off venture capitalists in later-stage fundraising.
Meantime, a handful of Connecticut investment funds and other companies have sold securities that claim the general solicitation exemption, SEC filings show.
But those reached by the Hartford Business Journal said they haven’t advertised.
That could be because they were unaware of the burdensome investor verification rules that go along with it, said Hartford attorney James Saya. The exemption requires companies to ask investors for tax returns or other personal documentation to verify they are accredited, which could scare away potential financiers, he said.
Despite the lack of activity, the Jobs Act could turn out to be a positive for the hedge fund industry, “especially for the smaller funds and emerging managers,” said Osman Kilic, a finance professor at Quinnipiac University and a board member with the Connecticut Hedge Fund Association.
That’s because the exemption allows managers to discuss their strategy and outlook in the press and with investors, Kilic said.
But for the larger funds that have a track record and an established network of investors, crowdfunding seems to make no sense, he added.
