Crowdfunding enters the business mainstream

Photo credit: Joe McKendrick

Photo credit: Joe McKendrick

By Joe McKendrick | October 29, 2013, Last week, two events took place that suggest that crowdfunding — in which startup or seed capital is raised over networks — has crossed the chasm from cutting-edge to business mainstream.

As suggested by startup consultant Larry Downes in a recent post at the Harvard Business Review blogsite, crowdfunding just hit its “big bang” moment.

First, the leading crowdfunding site, Kickstarter, announced it has now financed more than 50,000 projects, with pledges coming from more than five million backers.

Second, the U.S. Securities and Exchange Commission finally cleared the way for individuals to invest in crowdfunded ventures, as spelled out in a recent proposed rulemaking document. The SEC has held up provisions of the 2012 Jumpstart our Business Startups (JOBS) Act, pending investigation and review of procedures for allowing startups to publicly solicit direct investments. Until all is approved, crowdfunded investments into startups are categorized as “donations” versus equity stakes. Plus, the activity is still limited to “accredited” investors, which the SEC defines as having verified annual income of over $200,000 or net worth of $1 million.

The emergence of unfettered crowdfunding is significant, Downes says, because crowdfunded equity financing — borne on websites and linked through social networking — has the potential to not just disrupt the current finance market, but “blow away” the existing structure.

Plus, crowdfunding isn’t just going to shake up the startup financing market — it will have a disruptive impact on existing business practices as well. As Downes puts it, crowdfunding will change the way research and development is approached:
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