The Equity of the Crowds

Congress Could Empower Crowdfunding Sites to Become Proper Mini-Investor Platforms

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(flickr.com/kheelcenter)

With 407 votes last week, the U.S. House of Representatives passed a bill (Entrepreneur Access to Capital Act, H.R. 2930), that would allow an SEC exemption for crowdfunding sites, whereby entrepreneurs could raise up to $2 million in exchange for equity from small-time investors.

As it stands, crowdfunding sites like Kickstarter (NYC) and IndieGoGo (NYC and SF) host projects that accept donations with no promise of monetary remuneration. Kickstarter and IndieGoGo investors are paid back in chip clips, early access, memorabilia, and other favors from the project’s creators, sort of like an NPR fundraising drive. 

The law prohibits entrepreneurs from soliciting or taking investment in exchange for equity from anyone who is not an accredited investor (individuals need a $1 million net worth) unless it’s done in a public offering through SEC procedures (an I.P.O). The law has been in place for 90 years, said Slava Rubin, CEO of IndieGoGo, and is a legacy law designed to prevent  scams wherein grandmothers in New York and Baltimore were sold plots of oil by dishonest salesmen who took the money and ran to the tropics.

But after almost a century, new crowdfunding technology has brought the issue up again.

Mr. Rubin said the idea became a bill after a petition to change the law that started as a campaign by entrepreneurs on IndieGoGo and at the same time, a few entrepreneurs behind the “Startup Exemption” campaign started pushing the change.

“Why are they thinking about changing the law? If the economy was good and everything was hunky dory, they would never touch it,” Mr. Rubin said. “What everyone talks about is how do we stimulate more jobs. The truth is, all the net new jobs in last 20 years come from companies that are five years old or less. That comes from Kauffman Foundation.”

(We also wonder if the grassroots-y, crowdfund-happy Occupy Wall Street movement has anything to do with it.)

He cited Emmy’s Organics, a small business that turned to IndieGoGo after being turned away by a bank. Now the company sells gluten-free products in 24 states. He also cited Walk In Love, an entrepreneur who quit his design job to open a kiosk selling t-shirts in a mall, and thanks to a successful IndieGoGo campaign, now has a store and 15 employees.

Not all crowdfunding sites are keen to offer equity or act as a launchpad for startups. Although Kickstarter did not return a request for comment by post time, the startup has in the past expressed a preference for the D.I.Y., art for art’s sake, indie films that will never make any money, over the “help me launch my business” angle to crowdfunding. Not to say no one’s ever made money off their Kickstarter.

Acting as a platform for investment could bring onerous due diligence requirements to crowdfunders as well as sully their artsy cred. And considering isolated stories of backers getting involved in sketchy ventures, we wonder whether it’s wise to allow the oil salesmen into the crowdfunding space which is currently fairly utopian.

Follow Adrianne Jeffries on Twitter or via RSS. ajeffries@observer.com

Comments

  1. Love everything about this.

  2. Dan Mueller says:

    Watch them requirements… these are startups, not firms!  Focus needs to be on building the business, most likely with limited funds and resources.  The sophisticated reporting can come later.  For early stage, it’s just the basics (part of the risk/reward scale).