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Crowdfunding, a New Source of Capital!

Posted on May 10, 2012 at 9:51 am

Nathan DellOn April 5, 2012 President Obama signed the legislation a law a landmark bill, call the Jobs Act. This bill is a huge win for entrepreneurs across the country because it opens up the flood gates to new investors by establishing a framework for crowdfunding.  Crowfunding enables small companies to solicit equity capital from myriad small-dollar investors through a U.S. Security and Exchange Commission (SEC) registered websites. Previously regulations made it unlawful to sell stakes in their company to unaccredited investors making it harder for entrepreneurs that do not live in venture capital hot spots to raise funds (Khazan, 2012).

But like any new bill it comes with some basic rules that help protect the both sides of the transition and establish the government’s vision of the crowdfunding framework. Before an entrepreneur can create a profile on a SEC crowdfunding website they must first pass a background check, weeding out fraudulent companies, and their business must be native to the U.S., not public, nor an investment company. On the flip side, investors would be required to pass a quiz proving their understanding that there is no go guarantee of return on investment and that their return is limited to any dividends, sale, public offering or a merger of the company. Investors are also limited to the amount of money they can contribute to any one investment based off their incomes. Once investor has invested the business will be required to provide a quarterly report to investor to help them stay aware of the company’s progress (Best, Neiss 2012).

Social media will be deployed to help increase integrity and help control the process. Entrepreneurs would only be allowed to solicit investors from their social network using standard social network websites for example Facebook, Linkedin, Twitter etc. The crowfunding platforms will use social networking media tools to provide a deal room in where investors can publicly pick apart the entrepreneurs business. Also, no money will exchange hands until the target amount of capital is raised. For example, if an entrepreneur is looking for 10,000$ of seed money to help start their business they must disclose everything to investors and must reach 10,000$ of investment before they can receive any funds (Best, Neiss 2012).

This model could also provide unforeseen benefits. For example, the lean start model could be deployed in the deal room or collaboration portal as a way for entrepreneurs to freely test their ideas in a limited market place before building anything. By seeing investor not as only as a way to obtain capital but also as potential customer the product idea and design could be tested. The portal will allow “customers” to provide feedback on product and once satisfied with the potential outcome capital could be obtained for the first prototype of the product. The cycle could be repeated once an initial prototype is built and further capital is required to take the product to the next level.

By implementing the crowdfunding framework in this way it will help to tap unknown investors that were previously off limits and provide a way for investors to safely invest in idea and project they feel positive about. The government will also stay informed and regulate this deal and protect both sides of the transition.

But before this framework is fully deployed and operational the SEC will spending 90 days creating more concrete rules and regulations that are required before it can be deployed to the public. After government has established basic rules it will open up the draft for 90 days of comments from entrepreneurs and investors. During this 90 review process it is imperative everyone interested in using this new framework for either investing or generate capital be involved in the review process in order to establish the best rule set possible (Best, Neiss 2012)!

Stay tuned for information on how to participate in the 90 day review process!

Nathan Dell is currently a Carnegie Mellon University Masters of Information Technology student.