Regular folks are putting cash into startups
Last year, Randy Murphy went to DietBet.com and bet $25 that he could drop 4 percent of his weight in four weeks. After shedding about 20 pounds, he won back $50.
Now he’s making an even bigger bet: Murphy invested $1,000 in the company that owns DietBet, New York-based WayBetter Inc.
Making the purchase which was the first time he’s bought a company’s stock — was easy. Murphy clicked a link in an email from WayBetter that invited DietBet users to invest. After a few clicks, he had ordered up 1,000 shares for $1 each.
“I’m not a wealthy guy, but I felt like the risks were worth it,” says Murphy, a program manager and a volunteer medical first responder in Toronto. “It has the potential to pay off.”
Usually only rich people and venture capitalists invest in startups. But now more regular folks are getting the chance.
That’s because of two major changes to a federal law that have made it easier for small businesses to sell shares and raise cash from the public. Last June, rules known as Regulation A were updated in an effort to get more companies to raise money from the public. And last week, brand new crowdfunding rules went into effect allowing even smaller companies to raise up to $1 million a year from average Joes and Janes.
Many are hitting up their customers. Shoppers who go to BeautyKind.us to buy moisturizer or perfume will see a banner on the top of the site: “BeautyKind is going public! Click here to learn how you can be a BeautyKind shareholder!” Fans of Virtuix , a developer of virtual reality gear for video games, will see a link on the top of its website: “Interested in investing in Virtuix?” N1ce, which sells frozen mojitos, daiquiris and other cocktails in easy-to-carry tubes, told its 13,000 Instagram followers that it was crowdfunding: “Take your chance to own a part of N1ce and claim a front row seat to our journey as we go global.”
Investing in startups is risky. Most fail. And many don’t have a proven business model. Some desperately need the money to hire employees, make a product or open a store. Experts say there are a few ways investors can make money from their investment, such as if the company is bought or if it goes public. None of that is guaranteed to happen, and if it does, it could take years, experts say.
“The bottom line is that Main Street investors should not invest beyond what they are comfortable losing,” says Mike Pieciak, who is the deputy commissioner for Vermont’s securities regulator and serves on a committee that advises the Securities and Exchange Commission about small companies.
To protect inexperienced investors, the SEC limits how much they can invest, depending on which rules the companies use to raise money. For example, if your annual income or net worth is below $100,000, you can invest $2,000 or 5 percent of your income or net worth, depending on which is less. In addition, financial details and other information about the companies are available for investors to read on the SEC website.
While the crowdfunding rules are brand new, Regulation A has been around for years. But small companies rarely used Regulation A because the maximum $5 million they could raise in a year didn’t justify the costs of winning regulatory approval, says Gary Emmanuel, a securities attorney at McDermott Will & Emery in New York. In 2011, for example, only one company received approval to sell shares under Regulation A, according to a 2012 report by the U.S. Government Accountability Office.
The 2012 law known as the Jobs Act increased the amount companies could raise to as much as $50 million in a 12-month period. Since the law took effect last June, more than 80 companies have applied to the SEC to sell shares and more than 30 of them have been approved. And since the new crowdfunding rules went into effect Monday, more than 25 have signed up.
Murphy read about the risks before he invested in WayBetter. His $1,000 investment is small enough that it won’t hurt him much financially, he says. Murphy believes in the company and already knows that DietBet helps people lose weight. He also liked that WayBetter is expanding its betting model to other products, such as StepBet, which motivates people to walk more. WayBetter, which declined to comment for this story, wants to raise as much as $20 million through Regulation A.
“I love the idea of getting in on the ground floor,” says Murphy.
So does Sean Haffner, who invested in Elio Motors, a company developing a three-wheeled car that is expected to cost $6,800 and up.
Haffner had never heard of Elio Motors until two years ago, when he saw an orange prototype of the company’s three-wheeled car on display at a Stamford, Connecticut, mall. Haffner sat in the backseat and quickly became a fan.
“I was kind of skeptical of it, but it was really comfortable,” says Haffner, a manager at pet-sitting and care company 203 Pet Service.
He went home, revved up his computer and immediately signed up for email updates from Elio Motors. A year later he received an email, saying he could buy stock in the company. He did, paying $600 for 50 shares at $12 each. The stock was later listed on the OTC Market and is currently trading above $20.
Elio Motors has never delivered a car and has never made any revenue since it was founded about eight years ago. But the Phoenix company was able to raise nearly $17 million from investors through Regulation A. After delays, its first vehicles which will be ready for customers next year, says Elio Motors CEO Paul Elio.
Haffner hopes his $600 will help build the next American automaker.
Copyright 2016 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.