Thursday, August 30, 2012

So what is this crowdfunding, anyway?

New legislation by Obama and Congress relaxes solicitation by start-ups

By Jim Brendel
Originally published in Accounting Today

The trendy new term in the high tech arena is “crowdfunding.” Both the President and Congress jumped on the crowdfunding bandwagon as a way to show they are doing something about the economy by passing the JOBS Act. What exactly is crowdfunding? Here’s one introduction through the eyes of a professional accountant and auditor.

Essentially, crowdfunding is the ability for a large group of people to band together and make small investments that collectively are enough to fund a start-up company. Prior to the act, that wasn’t feasible because the limit on the number of shareholders before having to report as a public company was 500. The legislation raises that to 2,000. Naturally, this will be done over the internet, through what the legislation terms “funding portals.”

It’s a hot topic for businesses because they are always looking to raise capital. The hard part is figuring out a way to get investors together. Without some kind of exchange, only tech savvy companies that had a web-based business could raise money that way. Now several funding portal websites have risen to fill the crowdfunding void. Anyone, even if not incorporated, will be able to use crowdfunding. It is only limited by the attractiveness of your idea and ability to present it.  

Kickstarter, CircleUp and Fundable
The remarkable thing about crowdfunding is how successful it’s been even though the SEC hasn’t created rules for it; they are not due until the end of 2012. The appetite for small investments in companies is proven by the report that the website Kickstarter has raised more than $200 million for 22,000 product offerings. Two million people have supported these products, receiving nothing more than what amounts to a digital “attaboy” and maybe a sample of the product.  Investors are termed “supporters” because they don’t currently receive any ownership in or financial information about the retail product start-ups.  In April, the SEC reminded issuers that “any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.”

Kickstarter started all this three years ago.  Co-founder Yancey Stricker was quoted as saying that only five percent of the projects appealing for funding are rejected, while 56 percent of them fail to meet their fundraising goals. Film fundings are the most successful projects on the site, with 12 Kickstarter films showing in the Tribeca Film Festival this year. Company officials say they won’t switch to equity shares, even when the SEC rules are out.

Here’s a typical reward for supporters of ReAct Theater in Seattle: For $10, you get an admission to a play in the theater; for only $30, you receive invitations to cast events and backstage passes; for $250, you can have dinner with the theater’s board and for $1,000 or more get a special VIP night with a pre-show dinner, front row seats and drinks after with cast members.

CircleUp, on the other hand, offers direct share ownership in consumer product start-ups in return for your financial support. According to the company’s website, “Your ownership will be proportional to the amount you invest. As the company grows, so will your equity investment. This ownership will allow you to receive distributions when the business is sold or if dividends are paid.” The site does not offer a rewards model. CircleUp is able to offer equity because they currently only accept “accredited investors,” who must have $200,000 of annual income or $1 million in net worth.

Fundable attempts a combination of both methods. The company said that it will – as required by the new law – register with the SEC and a yet-to-be decided self-regulatory body as a broker-dealer before it can sell shares of companies. CircleUp will have to do the same in order to offer shares to the public. Fundable charges companies 5 percent of every dollar raised. One of its successful products was an elevation training mask that simulates training at elevation for runners and cyclists. The product goal was to raise $10,000 and it had raised $14,000 a month before its deadline. The most popular “reward” level was $75. For that you got a mask, a beanie and a t-shirt.

To the trained eye, there are some obvious challenges to crowdfunding. The first and most obvious is the probability that it could be used for fraudulent activity. The second is that even if investors receive actual shares of the company once the SEC rules are set, these shares are private and illiquid, meaning that once you’ve bought them there’s little chance that you will be able to sell them to someone else. The crowdfunding sites are not exchanges, just angel investment collectors. The third is that there are few requirements – if any – to inform investors about what’s happening with the company.  SEC chairwoman Mary Schapiro has already said that the JOBS Act would weaken investor protection.

SEC attorney John Eckstein of Fairfield & Woods in Denver notes that crowdfunded shares per the JOBS Act are to be sold in a transaction which is exempt from registration under the 1933 Act (new Section 4(a)(6)).

“We are all assuming that the shares once they have come to rest in the hands of an investor will be 'restricted' stock which cannot be resold unless they are subsequently registered under the 1934 Act or exempt (e.g. Rule 144 or "Section 4(a)(1 1/2)" type transactions,” Eckstein says. “The SEC has a lot of regulation writing to do to make the rules for this new exemption clear and facile for the use by issuers, intermediaries, investors, and service providers such as accountants and lawyers. Many things are yet to be determined.”

Eckstein says there is a political battle for the right to be the self-regulatory agency over portals.

“FINRA (Financial Industry Regulatory Authority) would certainly like the job, but there is at least one new portal trade association (Crowdfund Intermediary Regulatory Association) trying to form to do the job. My bet is on FINRA, which is also trying to get the job of regulating registered investment advisers after Dodd-Frank, but there are reasons why FINRA may not be the best public policy choice,” Eckstein says.

Crowdfunded companies that raise more than $1 million during one 12-month period or have more than 500 shareholders will have to register as public companies and begin public reporting. Until then, these new looser regulations will no doubt allow some winning companies to emerge. They will probably be in the minority however, as some real stinkers emerge a year or two after they receive funding. Of course, that’s the nature of venture investing.

About the author
James Brendel, CPA, CFE, is the national director of audit and accounting for Hein & Associates LLP, a full-service public accounting and advisory firm with offices in Denver, Houston, Dallas and Orange County. He specializes in SEC reporting and assists companies with public offerings and complex accounting issues. Brendel can be reached at or 303.298.9600.

Thursday, August 23, 2012

Why Disillusionment with Cleantech is Not Such a Bad Thing

By Christine Shapard, Executive Director, Colorado Cleantech Industry Association

These days, some major proponents of cleantech are having a hard time staying optimistic about the future of the industry. With continuing news of layoffs at major companies like Vestas and closures of some businesses, like Abound Solar, it’s easy to think that cleantech may not become an economic engine within the next decade.

But if history proves us correct, cleantech will only flourish in the next few years because of the dedication of a few. Sometimes, the biggest things happen after the parade has passed.

Have you ever heard of the Hype Cycle? Coined by Gartner, Inc, a hype cycle is a graphic representation of the maturity, adoption and social application of specific technologies. A hype cycle is a good representation of how nascent technology industries grow, from the breakthrough Trigger Point, to Irrational Exuberance, through the Trough of Disillusionment, up the Slope of Enlightenment and landing on the Plateau of Productivity. Hype cycles can be applied to almost all new technology industries including smart phones, internet sales, and search engines, to name a few.

What about cleantech? A nascent industry if there ever was one. Yes, the Gartner Hype Cycle applies to cleantech, as well. So where are we? About five years ago, some in the cleantech ecosystem were in the irrational exuberance state and witnessed high valuations along with high levels of venture dollars flowing into the industry. Today? That’s a tricky question for the cleantech industry. Because cleantech encompasses such a wide variety of technologies, we find our companies at various points in the cycle. 

Of particular concern of late are the companies mired in the trough of disillusionment. A few of the early high flyers have exited the market due to economic contraction, global competition, poor planning or a myriad of other reasons. In turn, some venture capital has pulled away from early stage investing because they were burned at the beginning, which is not good for the current start-up community. The good news is, the market is correcting itself and companies should begin entering the slope of enlightenment. Gartner points to the slope as the point at which enterprises start to recognize how the technologies can benefit their businesses. More instances of how the technology can benefit the enterprise start to crystallize and become more widely understood. Second- and third-generation products appear from technology providers. 

Colorado’s cleantech community continues to innovate, regardless of the national political rhetoric and the headwinds against them at the moment. I am confident that once we move beyond being mired in this negative cycle, the industry’s well-led companies and viable technologies will see an influx of capital and sustained growth. 

Monday, August 6, 2012

No Water, No Energy. No Energy, No Water

By William Sarni, Director and Practice Leader Enterprise Water Strategy
Deloitte Consulting LLP

Energy has long been considered an engine of economic growth and the world needs more of it. The U.S. Energy Information Administration (EIA) estimates that world energy demand will increase by 53 percent between 2008 and 2035. EIA further predicts that a large portion of this demand will be met through low-carbon, renewable forms of energy, but a vast majority of it will still satisfy traditional fossil fuels.

The connection between energy and freshwater has long been established, but few companies have plans for management. With growing instances of drought and flooding and increasing incidences of water scarcity, more public and private sectors are seeing freshwater for what it is: a scarce and precious commodity that needs to be managed more effectively.

It takes vast amounts of water to extract, process and produce many forms of energy and it takes vast amounts of energy to extract, transport and treat water. The demand for one could soon cripple our need for the other. When added to competing pressures of food requirements, these concerns multiply. The availability of both energy and water impacts our ability to adequately supply food to an expanding global population.

Unless we can manage energy and water, we will not likely be in a position to feed an increasingly hungry world. The competition for energy, freshwater and food raise serious concerns about economic development, national security and public well-being.

The Path Forward: New Technologies Needed to Reduce Energy’s Water Footprint

The solutions provider market is forecast to grow as new technologies are needed to address the water gap. From an energy perspective, the solution involves reducing water consumption in traditional energy production as well as moving towards energy sources that are inherently less water-intensive. Where do we go from here? We have outlined below top actions for water stewardship, as well as energy and power:

Managing the Nexus

Water Stewardship - Top Three Actions
       Track water use against energy use -- how much water is associated with direct energy use (onsite), purchased energy and in your supply chain?
       Develop an understanding of your water footprint and water risk within the watershed.
       Engage stakeholders within the watershed to develop a collective water and energy conservation and management plan.

Energy and Power - Top Three Actions
       View energy development (oil and gas, biofuels, etc.) as power generation within the context of the local watershed, i.e., “watershed-scale thinking.”
       Consider renewables (low water footprint) for watersheds experiencing water stress or scarcity.
       Engage stakeholders within the watershed to develop a collective water and energy conservation and management plan.

Embracing new economic and business models means meeting the needs of the water-energy nexus by leveraging new technologies.

William Sarni is a Director of Deloitte Consulting LLP and is the firm’s Practice Leader for Enterprise Water Strategy. An internationally recognized thought leader on sustainability and corporate water strategies, Sarni is a frequent speaker for corporations, conferences and universities. He is the author of “Corporate Water Strategies” and the forthcoming book, “Water Tech, A Guide to Investment, Innovation and Business Opportunities.” He lives in Denver.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.