It’s a powerful concept

“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.

 

 

4 Responses so far.

  1. Kavel says:

    My initial ccorenn is that crowdfunding is a less secure investment vehicle than traditional securities, which, to our chagrin post 2008, are less secure than we had thought. The Entrepreneur Access to Capital Act, in my limited understanding, grants certain exceptions to the Securities Act of 1933, which was passed in reaction to the great depression to help protect investors. These exceptions allow entreprenuers to more easily seek funding, and allow average citizens to more easily participate in business valid and economy-nourishing ends. But the Exchange Act was promulgated with the lofty goal of saving investors from losing their shirts, and I am wary of any exception to this shield. Congress seems wary too, as they have written investing limits and disclosure requirements into the act. But more, I think that Crowdfunding Offerings, acting as an intermediary, can best offer a baseline of protection for investors. At the very least, Crowdfunding Offerings will engender informed investors. That all said, what will you require of the entrepreneurs that you represent? Financial statements, business plans, surety? How will you weed out fraudulent or hopeless business ventures from your platform?

  2. Ashutosh says:

    In regards to We also need the “CrowdCos” to speak up and voice their reeeirumqnts. If this is first stage of investment needed, can the CrowdFund Intermediary align the next funding with their investment? The rules will most likely speak to stages of funding and the limits on that. The way the bills are written, the presumption is that the business requires $X in funding for a specific purpose. That purpose cannot be accomplished with less, or much less, so no money changes hands unless all or a significant portion (to be determined) of the offering has been funded. Also, investors must hold their shares for some minimum period of time to allow the business to put the funds to work and produce the desired outcome. An all-too-obvious end-around for this is to fund in stages. The problem with this is indeed obvious … if $100, 000 is needed to make the business fly and funding is sought in 4 stages of $25,000 each and the funds are released each time, if the goal is not reached with the final funding, the business fails and the money is gone. The assumption is that staged funding like this would be severely restricted.

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