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<div style="border: 0pt none;" id="google_ads_iframe_/2/interactive.wsj.com/pf_smallbiz_story_0__container__"><br></div><div style="border: 0pt none;" id="google_ads_iframe_/2/interactive.wsj.com/pf_smallbiz_story_0__container__">'Crowdfunding' Gets State-Level Test Run</div></div></div></header><section class="sector two column col10wide"><div class="column one col6wide">
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<div class="connect byline-dsk"><span class="intro">By</span>
<div class="social-dd">
<span class="c-name" rel="author" itemprop="author">Ruth Simon<span class="bk-box"></span></span> and
</div>
<div class="social-dd">
<span class="c-name" rel="author" itemprop="author">Angus Loten<span class="bk-box"></span></span>
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</div>
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<div data-module-id="[object Object]" data-module-name="resp.module.article.articleBody" class="zonedModule">
<div class="module datestamp-dsk">Dec. 4, 2013 7:46 p.m. ET</div>
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<img src="http://s.wsj.net/public/resources/images/MK-CI353_SBGUIT_G_20131204235400.jpg" class="inset-thumbnail-small" height="369" width="553">
</div><p class="targetCaption-video">
Shaun Lee, left, and Adam Lee, whose company,
Bohemian Guitars, is one of a dozen small Georgia companies making use
of new rules in the state that pave the way for 'equity crowdfunding.'
<span class="i-credit">Dustin Chambers for The Wall Street Journal</span>
</p>
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</div></div><p style="font-size: 15px;">Entrepreneur
Adam Lee
and his brother couldn't get a bank loan. Then they learned that
Georgia state officials had taken steps that might make it easier for
their startup, Bohemian Guitars LLC, of Marietta, Ga., to raise the
funds it needs.</p><p style="font-size: 15px;">The pair, who make and
sell oilcan guitars priced at $250 and up, are among a small but growing
number of entrepreneurs taking part in a sort of test run for new
federal rules: Officials in nearly a dozen states, including Georgia,
Alabama, Kansas and Wisconsin, have enacted or proposed new laws—or
tweaked existing policies—to make it possible for resident entrepreneurs
to secure financing from everyday local investors, also known as
"equity <span class="mandelbrot_refrag"><a class="mandelbrot_refrag" href="http://online.wsj.com/news/articles/SB10001424052702304799404579155133285408594?lc=int_mb_1001" data-ls-seen="1">crowdfunding</a></span>," according to the North American Securities Administrators Association.</p>
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<h4>Photos</h4>
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<a href="http://online.wsj.com/news/articles/SB10001424052702303997604579238723405583700?ref=SB10001424052702303722104579237862928397316" data-referer="SB10001424052702303722104579237862928397316">
<img src="http://s.wsj.net/public/resources/images/BN-AQ774_1204sb_D_20131204174549.jpg" class="inset-thumbnail-small">
</a>
</div><p class="targetCaption-video">
Bohemian Guitars sells oilcan guitars priced at $250 and up.
<span class="i-credit">Dustin Chambers for The Wall Street Journal</span>
</p>
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</div>
</div><p style="font-size: 15px;">Generally, these arrangements are structured as equity deals, with investors receiving a share of the profits, says
William Carleton,
a Seattle-based lawyer for startups.</p><p style="font-size: 15px;">The
push to make it easier for entrepreneurs and small businesses to raise
money comes as the Securities and Exchange Commission continues to mull
over the finer details of what, where and how small firms can use <span class="mandelbrot_refrag"><a class="mandelbrot_refrag" href="http://online.wsj.com/news/articles/SB10001424052702304799404579155133285408594?lc=int_mb_1001" data-ls-seen="1">crowdfunding</a></span>
as mandated by the 2012 federal law known as the Jumpstart Our Business
Startups Act. The agency issued a 580-page notice in October, but
hasn't said when final rules would be implemented.</p><p style="font-size: 15px;">Bohemian
Guitars is one of a dozen small Georgia companies that have notified
the state they plan to use the Invest Georgia Exemption, adopted in
December 2011. The startup has raised $126,000 using the new rules,
according to Mr. Lee. That's about enough to make at least 1,000
guitars, with some leftover to put into marketing and operations.</p><p style="font-size: 15px;">Mr.
Lee, who started Bohemian Guitars with his brother Shaun, spent six
weeks meeting with family, friends and Atlanta investors, laying the
groundwork for the guitar offering. "It's not just throwing up a profile
on a website and investors swarm at you. It's a lot of effort," he
said.</p><p style="font-size: 15px;">"I had to educate them on
crowdfunding and the Invest Georgia Exemption, and had to explain why we
were raising money on this unique format," he said. "After all those
educating points, I had to then move into courting the investors by
sharing my business plan and investor deck."</p><p style="font-size: 15px;">For
Daniel Popovic
of Atlanta, efforts to take advantage of the Georgia provision
proved less fruitful. He recently pulled the plug on his three-month
effort to use the Georgia exemption to raise $400,000 for cMEcompete, a
website that connects people with fitness activities in their
communities.</p><p style="font-size: 15px;">Lining up investors "is a
full-time job," said Mr. Popovic. "My energy is best spent building up
the platform and growing customers." Mr. Popovic also worried that
follow-on investors would be reluctant to fund a company where "thirty
or forty people" have small stakes.</p><p style="font-size: 15px;">The
mixed results highlight the challenges facing entrepreneurs trying to
raise funds from the general public, rather than just wealthy or
professional investors.</p><p style="font-size: 15px;">In 2011, Kansas
became the first state to allow intrastate crowdfunding, after
fundraising by a local dairy and efforts to build a new, small town
movie theater inadvertently ran afoul of state securities laws barring
the "general solicitation" of ordinary investors. The measure was also
designed "to encourage capital formation, especially in the smaller
communities," said
Steven Wassom,
executive director in the Office of the Kansas Securities
Commissioner.</p><p style="font-size: 15px;">So far, eight companies
have filed under the Invest Kansas Exemption, including two microbrewery
restaurants, a cafe, a defense contractor and a dairy.</p><p style="font-size: 15px;">But
there were some kinks in Kansas' initial approach, according to
Steve Piper,
an entrepreneur in that state. The owner of a small grocery
store, Mr. Piper said he tried to use the exemption to raise $500,000 to
relocate the Valley Café, a restaurant that he owned, into a building
he hoped to buy in Marquette, population roughly 640. Mr. Piper closed
the establishment after securing pledges for just $200,000, less than
the $300,000 minimum he needed to relocate and update the restaurant. </p><p style="font-size: 15px;">"We
tried it for about a year and came up a little short," in part because
the maximum investment at the time was $1,000, said Mr. Piper, who would
nevertheless recommend other local businesses try out the exemption. In
June, Kansas increased the maximum an ordinary individual could invest
to $5,000 from $1,000.</p><p style="font-size: 15px;">At the local
level, equity crowdfunding "is really an extended friends and family
round" for small, local shops and restaurants that aren't likely to seek
or receive professional angel or venture capital investments, said
Zach Brandon,
president of the Greater Madison Chamber of Commerce in
Wisconsin, and an investor in several local retailers. The Wisconsin
measure, signed into law in November, allows any state resident to
invest as much as $10,000 per venture and limits total fundraising to $1
million—or $2 million if the firm raising the capital agreed to a
financial audit.</p><p style="font-size: 15px;">Alabama State Senator
Arthur Orr,
a Republican, in November introduced legislation drafted by his
state's securities commission to allow local companies to raise up to $1
million from ordinary in-state investors in amounts of up to $5,000. "I
was waiting on the SEC to finish promulgating their regulations"
pertaining to the JOBS Act, he said, "but they have not seen fit to get
that completed." </p><p style="font-size: 15px;">The SEC says it won't issue final rules until sometime after a public comment period ends in February.</p><p style="font-size: 15px;">
Justin Bays
and his partner,
Jeremy Johns,
raised roughly $100,000 from about 20 local investors for Radius
Brewing Company LLC, a brew pub slated to open in January in Emporia,
Kan. When the cost of the project climbed beyond what they had
originally budgeted for, the pair sent postcards to members of the local
community inviting them to a private meeting where they made their
pitch for financing. That was something they couldn't do before the
exemption because it would have been considered "general solicitation."</p><p style="font-size: 15px;">"It helped us fill some of our financing needs, while also allowing the community to get involved," Mr. Bays said.</p><p style="font-size: 15px;"> <strong>Write to </strong> Ruth Simon at <a data-ls-seen="1" href="mailto:ruth.simon@wsj.com" target="_new" class="icon ">ruth.simon@wsj.com</a> and Angus Loten at <a data-ls-seen="1" href="mailto:angus.loten@wsj.com" target="_new" class="icon ">angus.loten@wsj.com</a> </p>
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