Proposed SEC Crowdfunding Rules Would Let Space Startups Give Backers Much More than Gewgaws

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SAN FRANCISCO — New U.S. Securities and Exchange Commission (SEC) rules expected to be published this spring that would allow startups to raise as much as $1 million a year by sharing equity with hundreds or thousands of individual investors could bolster space-related startups, but will not prevent companies with more ambitious goals from seeking traditional sources of financing, industry officials said.  

“Space in general has a very strong public appeal,” said Joe Landon, managing director of the Space Angels Network, a group that seeks financing for fledgling aerospace and aviation firms. “The space industry is poised to take disproportionate advantage of equity crowdfunding versus other industries.”

In October, the SEC proposed rules related to the 2012 Jumpstart Our Business Startups (JOBS) Act that would allow entrepreneurs to offer and sell shares of new businesses to individual investors through Internet crowdsource campaigns. Until the new rules take effect, people who pledged funding through crowdsourcing websites, such as the Kickstarter.com campaign that raised $1.5 million last year for the asteroid mining company Planetary Resources, have not received any financial stake in companies. Instead, they received incentives. Planetary Resources, for example, promised to invite some generous donors to its launch party and offered others the opportunity to select the images it would capture with its Arkyd-100 space telescope.

If, as expected, the SEC issues new rules within weeks to allow firms to sell stock through Internet crowdsourcing campaigns, space companies are poised to test this new form of financing. “I know of several companies evaluating this approach and waiting to see how it would work,” Landon said. 

Another space industry official who asked not to be identified said entrepreneurs eager to establish space-related businesses already have prepared crowdfunding equity campaigns and created websites they will unveil “as soon as the regulatory machinery is in place.”

With its $1 million limit, the new crowdsource equity rules will not eliminate the need for startups to wage traditional investment campaigns. However, they may replace the friends and family round, in which entrepreneurs ask people they know to support a new venture. “Companies that don’t have wealthy friends and family could raise $1 million that way,” Landon said. 

Still, company executives will need to turn to venture capital firms or other traditional investors to raise additional cash. “You would still have to find investors who could provide additional tens of millions of dollars,” Landon said. 

Not everyone agrees, however, that the new regulations will be of much assistance to space entrepreneurs. Because of the $1 million limit, equity crowdfunding is likely to be most useful for software and social media startups that are less capital intensive than space industry ventures, said Hoyt Davidson, managing partner of Near Earth LLC, an investment bank serving satellite, aerospace and telecommunications firms. In addition, crowdfunding success often depends on whether a campaign is adopted by popular websites and shared by supporters through social media as opposed to traditional investment approaches that rely on an in-depth analysis of the proposed business plan. “For these reasons, crowdfunding may work better for Silicon Valley-type deals versus other industry sectors and geographic regions,” Davidson said.

In addition, some entrepreneurs worry about potential drawbacks of the new crowdfunding equity proposal. 

“It exposes too many nonsophisticated investors to very high levels of risk,” said Tim DeBenedictis, founder of Southern Stars LLC, the San Francisco-based company that launched the SkyCube satellite Jan. 9 from the international space station. Southern Stars garnered initial funding for SkyCube from a highly successful Kickstarter campaign and continues to receive backing for its mission from thousands of sponsors who pay $10 to $6,000 each to support the mission in exchange for T-shirts, magazine subscriptions, images and tweets from orbit. “Equity investing and crowdfunding should remain separate things,” DeBenedictis said by email. If Southern Stars seeks external investors, it will do so through traditional means, he added. 

Until the new regulations become effective, companies seeking to sell stock in their businesses must follow the traditional procedure of registering with the SEC to sell shares or request an exemption from that registration process. Exempt firms face their own restrictions. They have to limit sales of shares to accredited investors, individuals with earned income of more than $200,000 a year and a net worth of more than $1 million. Those rules were put in place to protect small investors from betting on risky ventures. 

With the JOBS Act, the U.S. Congress was looking for ways to make it easier for companies to raise money by expanding the pool of potential investors. The SEC’s proposed rules would allow people with an annual income or net worth of less than $100,000 to invest as much as $2,000 or 5 percent of their annual income or net worth, whichever is greater, in crowdsource equity campaigns in a single year. People with an annual income or net worth of greater than $100,000 could invest up to 10 percent of their annual income or net worth, whichever is greater, in these offerings in a single year. Under the proposed rules, investors who purchase shares under this provision of the JOBS Act could not resell those shares within one year. 

The SEC’s proposed rules direct companies seeking to sell equity through crowdsourcing to disclose detailed information on their firm’s financial condition and to reveal the names of all officers, directors and anyone owning 20 percent or more of the business. In addition, companies would need to announce how many shares they planned to sell, the amount of money they hoped to raise and whether they would continue to welcome investment beyond once that goal has been reached. 

Before the comment period closed Feb. 3, the SEC received hundreds of comments on its proposed rules. Since then, the agency’s staff has been analyzing those comments and drafting recommendations for final rules. Before any final rules are issued, the five presidentially appointed commissioners who lead the agency will vote on the rules, said an SEC official who asked not to be identified.

NASA officials declined to comment on proposed crowdsource equity rules, but said they have seen the impact of crowdfunding in general. “While NASA does not conduct crowdfunding activities ourselves, it’s exciting to see that the nongovernment supply and demand for space related crowd funding projects is healthy and in some ways growing,” Jenn Gustetic, NASA’s Prizes and Challenges program executive, said by email. “It shows that many people really want to be a part of space exploration — and that the democratization of space with innovative communities around the globe is starting to take hold.”