What About Crowdfunding?

Is it the way to capitalize your businesss?

You probably keep hearing about crowdfunding, but is it really a panacea for funding your business, product or project, or simply a bunch of hype?

“Crowdfunding” is simply the process whereby large numbers of people use the Internet to pool their resources to support a common cause or project initiated by someone else. Crowdfunding has already been very successful in raising hundreds of millions of dollars for things as diverse as funding independent films, funding product development and getting cash needed for in vitro fertilization.

So far in the U.S., the funds given have been limited mostly to donations, peer-to-peer loans and product presales. In 2011, I founded a crowdfunding platform to help veterans get the capital they need to start a business. The possibilities seem endless in an era of social networks where a cause can be shared widely and inexpensively.

Funding the Business ‘Cause’

As big as it has already become, crowdfunding has the potential to be something far bigger in the near future because investment crowdfunding has been theoretically legalized in the U.S. In April of last year, the JOBS Act updated 80-year-old securities laws in order to facilitate using the Internet to raise investment capital. This change is widely hoped to provide small business with the investment capital that has been so absent lately.

In an era where banks often will not or cannot loan to small businesses, investment crowdfunding could bring a revolution in small business capital. If Americans will contribute hundreds of millions of dollars to back ideas or provide risk capital for product development – all without any piece of the upside, what will happen when they are given the opportunity to own their fair share of an idea they helped fund?

Networking with Limited Net Worth

This is exciting because the JOBS Act not only changed the way companies can use the Internet to contact potential investors, it also made it possible for ordinary Americans, not simply high net worth or “accredited” investors, to make crowdfunding investments. These investments are subject to $2,000 annual limits for most Americans. By greatly expanding the number of people who can invest, the hope is that this expanded investor base will fund companies that existing angel and institutional investors do not see as “investment grade.” Instead of funding yet another Internet company, perhaps everyday Americans will use the Internet to invest in their local coffee shop, bookstore or brew house.

The implications for local communities and business districts could be dramatic. Communities will be able to rally together to provide investments to start new businesses in a long empty local mall. Thinking locally, the arts community could rally together to provide investments for businesses based in the Eau Gallie Arts District. Because everyone will be able to invest, impact investing will be enabled for every interest. Investment crowdfunding has the potential to fund Main Street in a way that Wall Street never will.

So What’s the Catch?

Despite the passage of the JOBS Act, investment crowdfunding has not yet begun and there are legitimate concerns as to whether it will ever be a practical reality in the U.S. Even though all Congressional deadlines have passed, the SEC
has not written the rules under which crowdfunding investments can be made and these regulations are required before investments can begin.

The SEC is attempting to strike a balance between protecting investors from fraud and enabling the formation of a new crowdfunding industry that, almost by definition, cannot absorb large transactional and compliance costs. After all, it is the high cost of compliance under prior securities laws that often made it impractical for small businesses to raise equity capital. As to fraud, in other parts of the world such as Europe and Australia, investment crowdfunding has already been widely practiced with no significant examples of fraud.

So is crowdfunding the solution to funding your business or idea? Well, if your idea is one that people will fund without any piece of the upside (because your social network is large, your cause is compelling or your product idea interesting enough that people will pay in advance), crowdfunding may be your answer now. As to the broader market of actual investment crowdfunding, the federal lawmakers have done their part. Now the question is whether what emerges from SEC rulemaking will actually be viable for business owners, investors and crowdfunding portals.

Mark Mohler is a business lawyer at Corridor Legal Partners, serial entrepreneur and CEO of Sprigster, a crowdfunding portal. Contact him at (407) 810-6632 or mmohler@corridorlegal.net

 

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