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Startup Crowdfunding is Here

  • Blog Post by: Ernest Grumbles III
  • April 1, 2012 - 1:12 PM

If you have a great idea - whether in the creative, charitable or entrepreneurial vein - where do you get the money to launch?  You can pull from your own pocket.  And most do - at least to get things going initially.  Companies like Medtronic and non-profits like CaringBridge started at least initially with founder resources.  But unless you're wealthy, this often can only get you so far.  Sometimes you need to scale fast - in response to competition or market demand.  You could ask friends and family, the usual next step.  Again, whether this is viable depends on the kind of friends you have.  Banks?  Only if you have a going concern?  Angels or VC's?  Yes, if you have a track record or are an amazing networker (assuming the idea's good enough).  IPO?  Only when you're already in the market and successful.

Of course, the non-profit sector has been able to engage in large-scale public fundraising for a long time (through online campaigns).  And you can go on Facebook now and appeal to your social network to support a charitable initiative.  There are also platforms such as IndieGoGo, StartSomeGood and others that allow you to seek donations from the general public through social media.

The most well-known crowdfunding platform, Kickstarter, has an amazing story.  Originally focused on creative projects (films, plays etc...), it's expanded to include product development.  I had a client, Peak Design, that raised over $300K for the launch of its Capture Camera Clip (released last summer, now sold worldwide).  One game company raised over $3M to fund development of a new videogame.  Notably, these are not equity investments.  You contribute for designated benefits, usually the good in question, plus fun stuff like t-shirts or product add-ons.  Basically you're pre-selling your product to fund its finalization and market release.  Brilliant strategy.  Market test, complete R&D and take the first large orders all in one.  

But what of the lonely entrepreneur?  The SEC (and related securities laws) have long thrown up barriers to easy public equity fundraising for new business ideas.  Following the Depression, laws were put in place to protect the public from fraudulent stock sales.  Lengthy disclosures and other processes were required to ensure that the public would know what it was buying and what the true risks were.  Of course, these only applied to public offerings.  Private stock sales to "accredited investors" (wealthy individuals) were permitted.  But these exemptions apply to a very small percentage of Americans.  So only well-connected entrepreneurs with access to sophisticated investors were allowed to avoid the very expensive and time-consuming public stock registration processes.  In essence, average citizens have been effectively prevented from supporting startups in their communities.

Thankfully, necessity is the mother of invention.  And our economic woes, now 3+ years running, have demanded new tools and strategies to support innovative enterprise.   In light of the ease of information-sharing and success of crowdfunding sites like Kickstarter, Congress finally has delivered a means to let entrepreneurs to fundraise publicly from average Americans.

The JOBS Act of 2012, passed with overwhelming bipartisan support and now on Obama's desk (to be signed this Thursday), will allow entrepreneurs to raise up to $1 million per year through crowdfunding.  While the companies using crowdfunding will still need to "register" with the SEC, the paperwork is minimal compared to traditional IPO requirements.  Sites seeking to host crowdfunding efforts also must register with the SEC, advise investors of risk and take steps to prevent fraud.  For more info, see http://venturebeat.com/2012/03/31/jobs-act-law and http://thomas.loc.gov/cgi-bin/bdquery/z?d112:h.r.03606:.

The SEC will be developing regulations and more details will follow over the next few months.  But this is a great step to allowing the 99% to help support job-creating startups.  While there concerns about fraud on average investors, we have seen with the Enron scandal that traditional SEC practice hasn't stopped occasional rogue conduct.  By letting consumers share information and scrub opportunities in the ways they do best on the Internet, the overall risk of fraudulent investments will likely go down.  Startup investing is inherently risky.  No change to that.  But given all the legal ways to burn cash (gambling etc...), why not let citizens take a chance and invest in their local startups.  The JOBS Act will finally provide the means.

 

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