By, Sundownrundown.org, More than two years ago, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), calling it a “game changer” that would provide a new way to fund startups through crowdfunding. Crowfunding for equity, however, cannot begin until theSecurities and Exchange Commission issues final rules. Despite the hold-ups, some proponents urge entreprneurs to prepare now if they wish to seek funding through the crowd.
The JOBS Act authorizes the use of “crowdfunding,” in which up to $1 million worth of unregistered stock can be sold every 12 months to an unlimited number of mom-and-pop investors. Anyone, not just well-off individuals, can make small investments online. Under the law, a person making $100,000 or less would be limited to investing $2,000 (or about 5 percent) of the indvidual’s annual income. That limit raises to 10 percent for someone worth more than or earning more than $100,000 per year.
The JOBS Act empowers licensed brokers or licensed Internet “funding portals” to handle crowdfunding transactions. Investments can be offered in forms of securities such as a membership interest or debt in a company. The intermediaries must do some vetting of companies, such as background checks on officers and directors. The SEC must create the rules that would license and regulate intermediates and crowdfunding transactions. Currently, popular sites such as Kickstarter and IndieGoGo give users the ability to crowdfund projects, although these transactions do not give equity in a business and act more like donations or the pre-purpose of goods.
Commentators believe that equity crowdfunding can help fill the gap between funding a new venture through bootstraping and the amount of minimum investments that angel investors or venture capitalists would be willing to offer. For example, a study by Nestasuggests that crowdfunding can offer a new source of capital for start-ups seeking investments between zero and three million dollars. Crowdfunding opens two investment markets, according to the authors: “One is the initial seed money to start a business, where friends and family finance may be unavailable or insufficient, and amounts required are too small for business angels to get involved. There is also the gap above the level where business angles are usually active, but where the capital required is too small for venture capitalists to get involved.”
Sherwood Neiss, Partner at Crowdfund Capital Adviors, co-author of “Crowdfund Investing for Dummies” and one of the earliest proponents of crowdfunding, urges entrepreneurs to start now if they believe they seek capital through crowdfunding. “Anyone who has raised money will tell you it takes a lot of preparation,” Neiss said in an interview. “Take the time to learn how to crowdfund.”
“Study study study!” Neiss urges entrepreneurs. “Crowdfunding is both art and science. You need to have a solid idea, a solid team, a good business model that generates cash (science), AND you need to learn how to crowdfund. People believe that just because the technology and these websites exist, that money will be flow in. This is a false pretense. Campaigns that are successful are highly curated. Anyone who has raised money will tell you it takes a lot of preparation.” In addition to Neiss’ book on crowdfund investing, Neiss also recommends users can get training through the Success with Crowdfunding program.
What about the crowdfunding rules? Neiss is hopeful that the SEC releases rules to regulate crowdfunding later this summer. “The SEC issued the draft rules in October, 2013,” adds Neiss. While not perfect, what they do allow is for crowdfund investing to get started. This will allow us to see where it is working, where bottlenecks might exist, and how we can fix them.”
Impatient with the SEC, Congressman Patrick McHenry (R-NC) sponsored this summer theStartup Capital Modernization Act of 2014, which he claims would “fix” defects in the original JOBS Act to encourage crowdfunding. Proponents are hopeful that the new bill would not cause delays in the release of new rules under the JOBS Act.
Despite the fact that the JOBS Act passed with significant bipartisan support, some naysayers believe equity crowdfunding will be a “disaster waiting to happen.” In a recent article in Slate, author Jim Saska contends that Title III of the JOBS Act “gave us a regulatory hurricane. Crowdfunding’s extensive registration and disclosure requirements manage to be simultaneously too heavily regulated for businesses to use and too poorly regulated to protect investors. In an attempt to reconcile these diametric failures into something resembling a useful law, the SEC released a 585-page rule proposal, but no amount of lawmaking lipstick will make this statutory pig pretty.”