Not afraid of risk? Invest in a start-up

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Joseph Pisani

Last year, Randy Murphy went to DietBet.com and bet $25 that he could drop 4 percent of his weight in four weeks. After shedding about 20 pounds, he won back $50.

Now he’s making an even bigger bet: Murphy invested $1,000 in the company that owns DietBet, New York-based WayBetter Inc.

Making the purchase — which was the first time he’s bought a company’s stock — was easy. Murphy clicked a link in an email from WayBetter that invited DietBet users to invest. After a few clicks, he had ordered up 1,000 shares for $1 each.

“I’m not a wealthy guy, but I felt like the risks were worth it,” said Murphy, a program manager and a volunteer medical first responder. “It has the potential to pay off.”

Usually only rich people and venture capitalists invest in start-ups. But now more regular folks are getting the chance.

That’s because of two major changes to a federal law that have made it easier for small businesses to sell shares and raise cash from the public.

In June 2015, rules known as Regulation A were updated in an effort to get more companies to raise money from the public. And this May, brand new crowdfunding rules went into effect allowing even smaller companies to raise up to $1 million a year from average Joes and Janes.

Many are hitting up their customers. Shoppers who go to BeautyKind.us to buy moisturizer or perfume will see a banner on the top of the site: “BeautyKind is going public! Click here to learn how you can be a BeautyKind shareholder!”

Fans of Virtuix, a developer of virtual reality gear for video games, will see a link on the top of its website: “Interested in investing in Virtuix?”

N1ce, which sells frozen mojitos, daiquiris and other cocktails in easy-to-carry tubes, told its 13,000 Instagram followers that it was crowdfunding: “Take your chance to own a part of N1ce and claim a front row seat to our journey as we go global.”

Big risks

Investing in start-ups is risky. Most fail. And many don’t have a proven business model. Some desperately need the money to hire employees, make a product or open a store.

Experts say there are a few ways investors can make money from their investment, such as if the company is bought or if it goes public. But none of that is guaranteed to happen, and if it does, it could take years before it happens, experts say.

“The bottom line is that Main Street investors should not invest beyond what they are comfortable losing,” said Mike Pieciak, who is the deputy commissioner for Vermont’s securities regulator and serves on a committee that advises the Securities and Exchange Commission about small companies.

To protect inexperienced investors, the SEC publishes financial details and other information about the companies on the SEC website. More importantly, it also limits how much they can invest, depending on which rules the companies use to raise money.

For example, if your annual income or net worth is below $100,000, you can invest a maximum of $2,000 or 5 percent of your income or net worth, whichever is less, in start-ups.

While the crowdfunding rules are brand new, Regulation A has been around for years. But small companies rarely used Regulation A because the maximum $5 million they could raise in a year didn’t justify the costs of winning regulatory approval, said Gary Emmanuel, a securities attorney in New York. In 2011, for example, only one company received approval to sell shares under Regulation A, according to a 2012 report by the U.S. Government Accountability Office.

The 2012 law known as the Jobs Act increased the amount companies could raise to as much as $50 million in a 12-month period. Since the law took effect last June, more than 80 companies have applied to the SEC to sell shares, and more than 30 of them have been approved.

And as soon as new crowdfunding rules went into effect last month, more than 25 companies signed up.

Getting in on the ground floor

Murphy read about the risks before he invested in WayBetter. His $1,000 investment is small enough that it won’t hurt him much financially, he said. Murphy believes in the company and already knows that DietBet helps people lose weight.

He also liked that WayBetter is expanding its betting model to other products, such as StepBet, which motivates people to walk more. WayBetter, which declined to comment for this story, wants to raise as much as $20 million through Regulation A.

“I love the idea of getting in on the ground floor,” said Murphy.

— AP