Who’s Funding America’s Small Business and Start-Ups, You Are

Don Hunter’s Plan to Provide Equity Capital to American Small Business

This article was originally posted on The Wall Street Chronicle and written by Laura Ratcliff.

Donald J. Hunter has made an extremely successful career by being an analytical virtuoso. Over the course of the last 25 years, he’s created an enviable business history first as a broker, and then, moving his way up through the ranks, as managing director, COO and CEO at some of Wall Street’s most successful brokerages. Despite all of that, he will be the first to tell you that it started out as nothing more than luck. In fact, a career as a financial analyst and broker was not even in the cards until Lady Luck stepped up and changed his story.

Hunter, 47, was a semi-undecided psychology major at Colgate University in New York when he literally won a top spot in a lottery. Not a Mega-Jackpot dollar lottery, but the coveted lottery for prestigious internships held at Colgate each year. Since Hunter received number two in the lottery, he had the second highest choice of internships available to all students who were looking for a great opportunity. He chose an internship at the brokerage firm Drexel Burnham Lambert during the School’s 1 month J-term (January-term) and discovered that he not only had an affinity for the financial world, but he loved it. He went back to Drexel for two more internships and following graduation went to work full time for the firm.

Over the course of the next two decades, Hunter worked at several other firms, making his way up to the CEO position at Westrock Group, Inc., where he helped broker and manage the historic sale of the firm to LBC Western Holdings. The sale was historic because the Lower Brule Sioux Tribe owns LBC Western Holdings; Westrock was the first brokerage firm to be acquired and owned by a Native American tribe. At the time of the sale, Westrock had over $1.4 billion of assets under management.

Since the sale of Westrock, Hunter has been consulting for a variety of financial interests, but his latest and possibly most exciting venture is something much less traditional than his previous professional work. Hunter is founder and CEO of You-Funding.com, an equity crowdfunding platform. While some readers may wonder what the big deal is (after all crowdfunding has been around for years), equity crowdfunding is entirely another ball of wax. Instead of nebulous reward programs or “feel-good” online karma, equity crowdfunding investors can hope to see big monetary returns.

Before the JOBS Act (Jumpstart Our Business Startups Act) was signed into law in 2012, small businesses that needed under a million dollars in funding to get going were often out of luck. Banks often don’t want to loan large amounts of money to untested startups because the rate of failure can be very high. Trying to get a half a million dollars (or more) in startup money from “friends and family” is often impossible unless you happen to live in Silicon Valley and have invented the next big thing. Enter equity crowdfunding. According to Kendall Almerico, a contributing writer at Entrepreneur.com, “anyone who wants to start or grow a business will be allowed to use an online equity crowdfunding portal to raise up to $1,000,000 by selling stock in their company” (companies who need funds for growth after an initial start up are allowed to raise up to $10 million in secondary offerings).

Sounds simple, right? Not exactly. The problem is that equity crowdfunding, even though it’s relatively new, is eventually going to involve billions and billions of investor dollars (some people, according to Almerico, predict it to become a trillion dollar industry) and the safeguards for this activity have been mandated to be established first. For that reason, it’s not as if any company that wants to raise money can simply set up a website and say, “Hey, send us some money so we can get started!” While the JOBS Act had broad bipartisan support when it was passed and signed into law, it requires a high level of consumer protection in the form of Securities and Exchange regulations and FINRA (Financial Industry Regulatory Authority) oversight.

One of the major problems is that the SEC rulebook for equity crowdfunding that was released in late 2013 is 585 pages long. Even the SEC acknowledges that its own rules “could cost a new business as much as $30,000 to raise $100,000,” according to Almerico. “That’s enough to stop any small business in its tracks.” Hunter saw that he had an opportunity to not only get in on the ground floor of the equity crowdfunding industry, but he could also offer up a solid and money saving service to small businesses that just don’t have the financial chops to raise money on their own for start up or for growth. Additionally, You-Funding offers three payment options for companies who need to raise funds: they can pay a flat fee upfront (if they have the cash), they can finance the fee, or they can pay the fee in stock if it’s a publicly traded company. Whichever payment plan they choose, they stand to save tens and tens (or even hundreds) of thousands of dollars, depending on the amount of money being raised. Hunter says that equity crowdfunding can cost businesses “anywhere from 50-90% less” than a traditional stock offering on an exchange.

Hunter says he and his team carefully screen and evaluate the businesses accepted into the You-Funding.com family of startup or growth companies. Both he and a securities attorney vet companies who are interested in getting funds through equity crowdfunding. “Ultimately,” says Hunter, “it comes down to three things: they have to know their business, they have to have credibility in their industry, and they have to have a solid idea that they can perform on.” Hunter and his team are constantly on the lookout for companies that are candidates for equity crowdfunding. While there is no hard timeline for signing up new companies for investment, You-Funding is working to add new investments on a monthly basis. Hunter notes that he finds businesses that are good candidates in a variety of ways. Sometimes, he will get a call from a broker he knows who cannot fund a particular company because it is too small for their investment portfolio. Other companies have made inquiries through the You-Funding website or online advertisements, and often he finds companies through old-fashioned networking.

Hunter says that the stringent rules for company acceptance they have in place, as well as the years of experience his team has, helps to weed out companies that will likely underperform. “Even though this business is over the Internet, you still need to know the people at the (start up) companies. You need to see their headquarters. Even though I may never know all of the investors, I will always know the companies themselves.”

Hunter says a good example of this type of company is I-TAP, Inc., one of You-Funding’s initial offerings. I-TAP is a company that develops and distributes electronic draft beer dispensing systems. Hunter says that I-TAP is a great candidate for equity crowdfunding for several reasons. One of the principals is a former Budweiser executive, so he has excellent experience and ability to network within the industry. Additionally, Hunter says that I-TAP has data to prove their system. According to Hunter, I-TAP can save 8% of a pour over a hand-poured beer. While 8% on a single beer may not seem like much, in a setting such as a stadium where thousands of beers are poured, the savings can be significant. Additionally, I-TAP has already been successful in gaining a significant customer base within the industry and is now in the beta-testing phase of development for stadium type venues. Even so, I-TAP was unable to acquire funding from a bank, and it’s too small for an investment firm. Hunter says this type of scenario is exactly what equity crowdfunding was designed for, “Equity crowdfunding fills the niche for small companies.”

The reality is, investments of any kind can be very risky. As Hunter says, “There are no guarantees. NONE.” However, Hunter is determined to do everything he can to protect people who want to invest at the crowdfunding level. He says one way to do that is to diversify the portfolio You-Funding.com will offer to potential investors. Instead of offering only start up funding for new companies, You-Funding.com will also offer up secondary offerings from small over-the-counter companies that need funding for growth or new operations. The beauty of secondary offerings, according to Hunter, is that they are typically available at a discount over the initial offering, and people who purchase them can sell them after six months, often at a hefty profit. Hunter says it’s also a lot easier to find good, quality companies that need funding for expansion, because they are already on the road to success and need extra funding to grow even more. It becomes a win-win situation for the companies who need funding as well as for investors. Additionally, says Hunter, once you start successfully funding companies that need help, other successful companies that need funding see that they can enter the arena, too. “It becomes a very nice cycle,” says Hunter.

People who want to invest in crowdfunding with You-Funding can do so at no cost other than the investment in the company itself. You-Funding does not charge investors any type of funding fees, and investments can be made immediately as long as they are accredited investors. Hunter says that You-Funding solicits new investors through online advertising.

Hunter has plans in the works to protect his investors, though he stresses that these types of investments are never guaranteed and are in fact, considered high risk. One of the things he has in mind is to create a mutual-type investment fund that will help You-Funding investors spread the risk. Hunter says that investors “should not fall in love with one company and put all of their eggs in one basket.” By giving investors the opportunity to invest in a pool that supports all of the You-Funding companies, Hunter believes that investors will have a much higher chance of a happy outcome. “If done correctly, it can be a very profitable class of investments.” The fund will be managed by a broker who will be doing all of the review, analysis and pre-listing due diligence.

For now, equity crowdfunding is not open to everyone who wants to invest. Under the SEC rules that are now in place, investors must be accredited in order to participate, which basically means investors must have deep pockets (an individual income of over $200,000, or a joint income of over $300,000, or a net worth of over $1 million). Accreditation involves proving a certain net worth as well as following detailed regulations put in place by the SEC for these types of investments. However, at some point in the (hopefully) not too distant future, middle-class Americans will also be able to participate in the equity crowdfunding phenomenon, once the SEC stops dragging its heels and finalizes the Title III rules of the JOBS Act, which will cover investing for non-accredited investors. Part of the reason it is taking so long to open the investment class to unaccredited investors is because of the number of entities that have to weigh in, simply because of the huge number of people who could be potentially affected. Not only must the SEC and FINRA participate in the rule making process, but also each state must put in place its own set of rules and protections.

While some people may think it is unfair to be blocking out such a huge group of investors (up to 58% of Americans would like to participate in equity crowdfunding), for now it may be necessary. There is real concern that without strict rules in place, some investment firms could be operating like the Wild West. Hunter says he’s seen it before. “Twenty years ago I’d laugh when people would be trying to sell funds or securities out of their kitchens that seemed like obvious frauds; how could they get away with it?” While these types of “Wild West” scenarios are rare, they have created more awareness for oversight, which is why the Title III rules are taking so long to finalize. In the long run, however, Hunter says that equity crowdfunding will ultimately be more beneficial to both investors and to companies that are looking for funding. Overall, says Hunter, “it’s going to open up a whole new level of financing for small companies. And the most will be for deals between one and ten million dollars that wouldn’t get done otherwise.”

One of the most important things that can happen with the finalization of the Title III rules is to let the 99% in on the game. Ordinary Americans are clamoring for a chance to enhance their bottom line. Hunter says once the rules are in place, it will “open up a whole class of investments to the public that was never available before.” It could be a game changer for millions of people who are doing all they can to not only stay in the game, but to finally get ahead.

Hunter says that government bureaucracy may ruin that chance. The Title III rules have been in limbo for over a year. Although the SEC has said that putting the final rules in place for Title III was a top priority for 2014, we are no closer than we were a year ago to getting them finalized. Says Hunter, “My only fear in this environment is that they over regulate the industry right off the bat and diminish the whole reason the act was created.”

Despite the bureaucratic tangle that is holding up the Title III rules, Hunter remains optimistic. He says that the opportunities for ordinary Americans and small companies who are trying to grow have never been better. “For companies and investors it opens up an avenue of investing that was previously only open to institutional investors. It was impossible for the regular investor to get in on the ground floor.” Hunter says that while the risk is significantly greater in this type of investment, the opportunity for reward can also be great, though never guaranteed.

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