“Crowdfunding” is not a term many know but it refers to people pooling small amounts of money online to collectively fund a charitable or creative effort. In the past, crowdfunding has been used to make movies, launch rock tours – even help tsunami victims in Japan.
It’s a powerful concept, one that has capitalized on the unique strengths of the Internet to quickly bring together large numbers of people in support of a common cause.
Typically, crowdfunders aren’t seeking a profit or trying to build something sustainable. But what if they were? What if the common cause that brought people together wasn’t an indie film or music video but a coffee shop, a green grocer or a tech startup? What if small investors had a way to band together and fund small business ventures that otherwise might not get off the ground? What would happen then?
My answer: Good things, potentially. Entrepreneurs with great ideas but no money to pursue them and no chance of getting any from the bank would finally have their chance. Micro-investors who want to invest locally would finally have a way of doing so. Jobs would be created, economies would be stimulated, dreams would be seeded.
It’s close to happening. Congress recognized the possibilities inherent in such an expanded view of crowdfunding, and its response was the Jumpstart Our Startups (JOBS) Act, which was signed into law by President Obama in April.
The act – which will loosen SEC regulations that formerly blocked equity-based crowdfunding and allow entrepreneurs to gather up to $2 million in small chunks from investors – was passed with broad bipartisan support because it had become clear that the traditional approach to funding small businesses and start-ups was inadequate and unfair.
In 2011, for example, the U.S. loaned roughly $282 million to “small businesses,” but the majority of those loans went to established companies with $3 to $50 million in revenues – hardly what most of us would call “small.” Businesses and start-ups that hadn’t yet reached that $3 million threshold were often financed the “old-fashioned” way – with credit cards and home equity loans.
But as the economy soured, fewer were likely to risk those routes. The result: new business creation nationally dropped 23 percent after 2007, according to the Bureau of Labor Statistics, and by last fall the U.S. had fallen to 13th on the World Bank Doing Business report’s list for ease of starting a business.
Washington hopes the JOBS Act will go a long way toward reversing those trends by – in the words of Rep. Sam Graves (R-Mo.), chairman of the House Small Business Committee – “providing opportunities, increasing capital formation and paving the way for more small-scale businesses to go public and create more jobs.”
First, though, due diligence must be done. The government will spend the next year writing the rules by which this new frontier of equity-based crowdfunding will operate. I encourage them to move slowly and deliberately in order to satisfy justifiable concerns about fraud, investor exposure and regulatory complexity.
If Washington does its job well, by this time next year small business owners and dreamers will have access to capital that they never had before. That may well kick start the economy and help our slow-burning recovery catch fire.
It may also make a lot of dreams come true.
Ken Kousky is the CEO and president of Grand Rapids-based RelayFund, a new online community connecting entrepreneurs and ideas with capital, and CEO of the MidMichigan Innovation Center, a privately-funded, nonprofit business incubator.