Private investment is important for St. Louis’ burgeoning start-up scene.
Most entrepreneurs will tell you money for seed investment is accessible. The difficulty comes in getting to the next level of investment. Firms such as BusyEvent find second-round funding, amounts between $100,000 and $1 million, is much harder to find.
In 2012, the Securities and Exchange Commission made some changes to its rules designed to encourage private investment. The changes are multi-faceted, but there is one part of the JOBS (Jumpstart Our Business Startups) Act called Title II that allows private companies to advertise for investment to the general public.
St. Louis Public Radio’s Maria Altman explored how this new provision in the federal rules are playing out for BusyEvent, the only St. Louis company so far to take advantage of Title II.
Another part of the JOBS Act has yet to go into effect: The part that has to do with crowdfunding.
The Securities and Exchange Commission is still writing the rules for the Title III provision of the JOBS Act.
The goal of Title III is meant to democratize investment, letting people who have not been able to take part in private investment to do so using Kickstarter-type campaigns. For those giving cash to companies via crowdfunding, the investors would get equity in the firm rather than gifts.
Clifford Holekamp, director of the Entrepreneurial Platform at Washington University’s Olin School of Business, said when the JOBS Act first passed there were big expectations.
However, when it comes to Title III, he said, there isn't much expectation that it will provide the great shift it first promised.
"I think it will have a modest impact," Holekamp said. "I think it’s a good thing that will provide additional options for people. It’s not going to completely change the way society works or entrepreneurship runs in this country."
Here's how the crowdfunding provisions would work:
Anyone will be allowed to invest in a company using crowdfunding, but there are limits. People who earn under $100,000 a year can give a maximum of $2,000, or 5 percent of their income, whichever is greater. Those making more than $100,000 can contribute up to 10 percent of their income.
Meanwhile, companies will not be able to advertise directly to potential investors for crowdfunding. Instead they must go through a middleman, a website that is registered with the SEC.
Jim Brasunas, executive director of ITEN, a non-profit that helps technology startups in the region, says he expects a period of experimentation as the rules becomes more clearly defined.
"We don’t want it to become like going to the boats," he said. "It’s a high-risk environment, start-up technology companies -- most of them don’t make it. I think investors need to have that ability to risk that much money."
Meanwhile, Brasunas said, pressure for more start-up investment helped launch more angel groups here. Now he expects more super angel investor groups and venture capitalists will make their way to St. Louis.
"Companies have gotten that initial $50,000 or so," Brasunas said. "They’re now creating pressure higher up the food chain for investors, needing the $100,000, the half a million, the million, the $2 million, so that pressure is happening now, and I think the same thing will happen."
Follow Maria on Twitter: @radioaltman