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Arizona entrepreneurs may get boost from crowdfunding law

Upstart Arizona companies have a new way to raise money as a state equity-crowdfunding law debuts. But while this represents a potentially exciting opportunity, investors must be wary.


Arizona’s new equity crowdfunding law takes effect July 3.

It might spur economic development by helping tiny companies gain financing. It might enrich some shareholders.

But it certainly brings new levels of risk to the investment marketplace.

The law, which Gov. Doug Ducey signed three months ago without any dissenting votes in the Legislature, allows fledgling Arizona companies to raise modest sums of money by selling shares to Arizona residents through Internet intermediaries.

The law seeks to capitalize on the crowdfunding trend, in which people make donations, often to receive perks or rewards, through websites such as Kickstarter and Indiegogo. In fact, websites and social media likely will prove to be critical tools for matching companies with investors.

Under the new law, Arizona companies seeking financing will be able to raise up to $1 million over a 12-month period, assuming they haven’t undergone a financial audit in their prior fiscal year. If they have been audited, they can sell up to $2.5 million of securities.

The new rule is designed to ease the many disclosure, regulatory and cost hurdles associated with selling shares in the stock market. “It’s a great tool for startups and growing tech companies with a story to tell,” said Kevin Walsh, a securities-law attorney at Quarles & Brady in Phoenix.

RELATED: Farnsworth: ‘Equity crowdfunding’ bill could create more jobs

A blueprint for the Arizona law was provided by a provision of the federal Jumpstart Our Business Startups Act, passed in 2012 but for which equity crowdfunding rules haven’t yet been finalized by the Securities and Exchange Commission. Another section of that act lets corporations raise funds through mini-IPOs or initial public offerings, though at greater cost than with equity crowdfunding, Walsh said.

Arizona’s equity-crowdfunding law

A new Arizona law takes effect that will allow small companies to raise cash from investors with fewer costs and disclosure requirements compared to selling shares in the stock market. Here are some key provisions of the new law:

-Companies that haven’t undergone a recent audit can raise up to $1 million in a 12-month period, while recently audited firms can raise up to $2.5 million.

-Companies can’t accept more than $10,000 from any individual, except for “accredited” investors with relatively high incomes and net worths.

-Investors will receive less information from companies, and their shares likely won’t be liquid in terms of frequent trading.

-The new state law restricts fundraising to Arizona-based companies seeking to raise money from Arizona residents.

Economic-development officials hope the rule will attract promising young companies, or at least keep them from heading to the roughly 20 other states that have adopted similar laws. “Arizona is trying to prevent a brain drain,” Walsh said.

But equity crowdfunding won’t work for everyone. Some companies will still find it more worthwhile to apply for traditional bank loans or financing from venture capitalists, especially those requiring more than $2.5 million. Other companies won’t qualify because they won’t be able to meet various Arizona-centric requirements such as having their headquarters here, generating at least 80 percent of their revenue in the state and having at least 80 percent of their assets here, said Walsh, who expects to provide legal guidance to companies interested in equity crowdfunding.

Nor is fundraising success guaranteed. Companies won’t be able to accept more than $10,000 from any individual unless that person is an accredited investor — someone worth of at least $1 million or who earned at least $200,000 (or $300,000 if married) for the past two years. Investments will be restricted to those made by Arizona residents.

For investors, the companies most likely to seek money through equity crowdfunding would be among the newest, smallest and riskiest around. Arizona counts roughly 200 corporations, according to researcher Morningstar Inc., yet roughly three-quarters of them are struggling “penny stocks,” with stock trading near or below $1 a share. Many equity-crowdfunding companies would be even smaller, less mature and more speculative than the state’s penny-stock corporations.

“There will definitely be people who lose money, and some of the companies won’t be able to make it,” said Neal Van Zutphen, a certified financial planner at Intrinsic Wealth Counsel in Tempe. He suggests people view equity crowdfunding commitments as their most speculative investments — not far removed from visiting a Las Vegas casino.

One reason equity-fundraising companies will be riskier is that there’s no guarantee their shares will trade in an organized market. The most likely exit strategy for a company would be acquisition by another entity or person, though the most successful might dream of selling shares one day in an IPO. The lack of liquidity means investors should be prepared to hold on for years.

Also, investors will receive much less disclosure material from companies — even recent audited financial reports might be lacking.

On the other hand, equity-crowdfunding deals offer a chance to get in on the ground floor. In some cases, prospective investors might already know the principals of a start-up company — as relatives, neighbors or former co-workers, offering a chance to join up with them early.

“It’s an exciting opportunity, especially for people with connections to a local business,” Walsh said.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

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13-Year-Old Makes $100K Reinventing the Scooter Wheel

13-Year-Old Makes $100K Reinventing the Scooter Wheel

By Gabrielle Karol

Published September 13, 2013

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Nicholas Pinto may be one year away from high school, but he’s already doing big business.

The 13-year-old says he’s always loved scooters, but was frustrated by how quickly the wheels would break.

“As you develop your skills, like landing on the scooter harder when you’re going off of a ramp, what you want is for the parts not to break,” says Pinto, who lives with his parents and three siblings in Cranford, New Jersey.  He says he was spending a lot of money replacing the wheels every few weeks.

“I was saying, ‘Wow, this can’t be!’ I was trying so many wheels, I thought I better make my own and help the world,” says Pinto, who enjoys competing in scooter competitions.

Over a year ago, the entrepreneurial eighth-grader began researching manufacturers who could reinvent the wheel, so to speak. He says he finally located a manufacturer in California to make a durable, polyurethane wheel that would be tougher than the breakable plastic wheels found on most scooters.

“I made a step-by-step design with all of the dimensions and they did it,” says Pinto, who borrowed $2,000 from his parents to create 500 wheels, bringing his fledgling company LB Scoots to life.

“The LB stands for ‘Little Boy.’ It’s the name of my dog, a chocolate lab,” says Pinto.

Grassroots Marketing Helps LB Scoots Get Off the Ground

Once the wheels were made, Pinto says he built an e-commerce website with the help of Youtube tutorials and his mother, who had created a website herself for her own small business, a modeling and acting agency.

From there, Pinto says he started selling wheels thanks to word of mouth, showcasing his new wheels at skate parks and competitions.

“We went to competitions and had a big banner there.  We were giving out stickers and saying, ‘Everyone check us out online!’” says Pinto.

Within a year, Pinto was receiving orders from all over the country, and even as far away as Australia. “We made about $100,000 in the first year,” says Pinto.

Pinto says he’s going to stick to LB Scoots for now, but isn’t ruling out the possibility of branching out down the road.
“As I grow up, I want to keep having LB Scoots, and I would also like to start other companies,” says Pinto. He’s also mentoring his little sister, who’s an entrepreneur in her own right.

“She makes duct-tape wallets and paintings and sells them online,” says Pinto.

And with three years on his little sister and experience running a $100,000 business, Pinto’s got a lot of advice to share.

“She’s 10 … I help her out a lot,” he says.

Read more: http://smallbusiness.foxbusiness.com/entrepreneurs/2013/09/13/13-year-old-makes-100k-reinventing-scooter-wheel/#ixzz2eu1uwftR

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