So, where is my Crowdfunding?
As most entrepreneurs know all too well, one of the most difficult challenges to overcome for a small startup is raising capital to get an idea off of the ground. Last year, amidst much excitement and with broad bipartisan support, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law (I wrote about the JOBS act here), purportedly making it easier for entrepreneurs and startups to harness the power of the internet and crowdfunding to raise investment capital. However, we have yet to see crowdfunding put into action. Why is the government taking so long? How might the JOBS Act affect entrepreneurs when it is finally implemented?
The Problem with the SEC
The Securities and Exchange Commission (SEC) is now in charge of moving the JOBS Act forward, as it attempts to write regulations that will set forth how the law with be implemented. The agency is concerned with the potential for fraud or abuse through crowdfunding; through the anonymity of the internet, one could easily image a scenario in which a straw-man company, complete with a website, social media presence, LinkedIn contacts, and mailing address could open up shop, solicit capital investment, and then disappear without a trace in a matter of days. However, the SEC’s concerns are preventing the agency from issuing the necessary regulations, and the agency has already fallen behind its January 2013 deadline. The latest word is that we may not see regulations until 2014.
How Might Crowdfunding Help Startups
The idea of crowdfunding as it relates to startups is simple: using the internet to pitch an idea to millions of potential investors and selling small amounts of equity to raise capital. Up until now, there have been regulatory barriers, aimed at protecting small investors from unscrupulous and shady investments, that have made it impossible for entrepreneurs to use crowdfunding to raise capital. The JOBS Act, which creates a new exemption to the Securities Act of 1933, will allow entrepreneurs to directly solicit investment from the general public through an accredited crowdfunding platform.
Both investors and entrepreneurs stand to gain from the increased opportunities that crowdfunding can potentially provide. If everything operates as intended, crowdfunding will allow innovative entrepreneurs to raise capital quickly and cheaply, and remove barriers that kept middle-income people from investing in small companies. Where small startups formerly had to navigate the increasingly tight-wallet vetting process of traditional venture capital firms or had to have a “rich uncle,” they now will ostensibly have access to millions of potential small investors with even more millions of dollars.
Of course, there is the risk of fraud and abuse, and until the regulations are promulgated it’s impossible to tell how crowdfunding will affect entrepreneurship . However, most agree that crowdfunding has the potential to revolutionize the process of securing investment for a startup, and whether and how effective it will be remains to be seen.