Last week’s post discussed the growing attention being paid to addressing the need of small businesses to access capital, particularly if they are to play a role as engines of economic growth. Apart from headlines calling attention to this issue, we are also seeing business competitions which solicit business ideas with the winners getting funding to implement their plan. The post ended by saying that such competitions are only a drop in the bucket, and with a promise to discuss crowdfunding.
Crowdfunding has traditionally been a way to solicit donations from large numbers of persons, generally online. In the United States, crowdfunding has been used primarily by nonprofits or artists to support individual projects, with the donors getting something in return. For example, a musician would use crowdfunding to solicit small donations from fans to support production of a new album with the promise of a copy of the album in return.
A recent example of crowdfunding in action is the campaign to raise funds to send on a vacation the bus monitor being bullied in the video that went viral, Karen Klein. As reported in The Christian Science Monitor, as of June 22, 2012, the campaign had raised about $600,000.00 in 48 hours from small donors around the world.
While crowdfunding has been around for some time, recently-enacted legislation has increased its interest to entrepreneurs and investors. Provisions (Titles II & III) of the Jumpstart Our Business Startups (JOBS) Act have created an exemption from the onerous regulations that have in the past stymied companies attempting to use the crowdfunding model to bring entrepreneurs and investors together. Profounder is one such company which was forced to close its doors.
The JOBS Act aims to allow entities like Profounder to operate without having to submit themselves to the requirements imposed on securities brokers or dealers. They will have to register with the U.S. Securities Exchange Commission (SEC) as a broker under requirements that have yet to be established. Entrepreneurs using the service will be allowed to raise up to $1 million a year from individual investors. To protect investors the law limits how much an individual investor can commit. Entrepreneurs seeking funding will need to provide adequate information, including financial records and business plans to permit interested investors to make an informed decision on whether to take a chance on their business idea or model.
This development illustrates what makes the headlines at the start of the article (last week’s post) so interesting. Access to finance is one area where partnerships between business and government can make a tremendous difference, particularly to small businesses. But this requires us to pay attention, and to get involved where necessary.
In this case, the SEC still needs to write and issue the regulations that will allow the crowdfunding provisions to take effect. The agency is soliciting comments that will hopefully inform its writing of the regulations. Comments already provided on the crowdfunding provisions are available here.
Your input is also invaluable. What requirements would you consider acceptable to protect investors yet provide businesses with needed capital?
The devil will be in the details. Whether the provisions in the JOBS Act opens real doors for SMEs to access finance through crowdfunding will depend on the language in the SEC regulations. Click here to provide your own input.
Disclaimer: This article is not written by a securities attorney and is not offering advice on securities law. It provides information and opportunity for discussion only.
