Crowdfunding in the JOBS Act: Should you be skeptical?

By |2017-09-14T11:21:31-07:00April 5th, 2012|

If you’ve waded through all of the press coverage that The JOBS Act is getting, you have more than likely been reading about The Crowdfunding part of the act.   Crowdfunding is a fairly new way of raising money and was initially used to raise money for non-profits, projects in the arts, independent films and the like through companies like Kickstarter and Indiegogo.

According to Julianne Pepitone, reporter for CNN Money, “previously, entrepreneurs couldn’t sell shares in privately held companies to the general public. Now, with some restrictions, small firms will be able to raise up to $1 million from small-time investors.”

The goal of this part of the JOBS Act bill is to make it easier for small businesses to access capital through this new way of raising funds.  However, many analysts of this bill fear that this act and its crowdfunding language will make it easier for fraudulent investing schemes, while others are concerned that the last-minute senate amendment, which was added to enhance fraud protection, may have made the provisions of crowdfunding hard to use.

In an offensive move prior to the formation of SEC regulation as well as to likely quell some of the reported concerns, a group of 13 equity and debt crowdfunding platforms and industry experts announced on April 5, 2012, the day that President Barack Obama signed the bill into law, a leadership group that will pursue the development of self-regulation for the crowdfunding industry. The JOBS Act requires that all equity and debt crowdfunding platforms be a member of a national securities association. According to their press release  “this leadership group, CFIRA (Crowdfund Intermediary Regulatory Association), will explore the various paths to meet that requirement in ways that protect investors and support a vibrant industry.”

“The availability of crowdfunding as a capital formation option for entrepreneurs and small businesses is a huge opportunity for our economy to create innovative new products and services,” said Carl Esposti, founder of and leader of the CAPS Accreditation Program for crowdfunding platforms and a founding member of the leadership group.

Going forward, it will be important for small businesses to understand who the players in crowdsourcing are.  The crowdfunding members of this new organization include:

  • Crowdfunder, a Business Crowdfunding platform that will enable U.S. startups and small businesses to raise funds through equity and revenue-based investment.
  • Funding Roadmap, which is a business plan and due diligence reporting system on-the-cloud provides real-time planning, reporting, analysis, compliance, transparency and GAAP compliant financial statements.
  • GATE Technologies is a financial technology company that is working to create a new market infrastructure aimed at bringing efficiency, transparency to the unstructured global alternative asset markets.
  • Indiegogo is an established crowdfunding platform that according to their materials, “allows anyone, anywhere, to raise money for pretty much anything.” .
  • Launcht is creating white label crowdfunding platforms and the technologies needed for the donation and future equity crowdfunding industries and also hosts a crowdfunding marketplace for social entrepreneurs.
  • Motaavi will be an integrated trading platform and exchange where anyone can invest and trade shares of early stage companies.
  • RocketHub is already an established international donation-based crowdfunding platform.
  • SoMoLend takes a different aim at this market with a Web and mobile-based peer-to-peer lending website that uses lending technology executed within a hyper-localized geographic scope to connect small-business borrowers with individual and organizational investors. SoMo’s user-friendly technology allows business borrowers to raise capital from friends and family, customers and community supporters as well as from Facebook, Twitter and LinkedIn connections. Investors lend money directly to borrowers through the SoMo platform, which then packages the loans and sells them as notes, bypassing banks and credit-card issuers.
  • Wefunder states that it will “give all Americans the opportunity to invest in companies they believe in, and own a piece of the journey to success.”

According to Pepitone’s article, additional crowdfunding companies to watch include, AngelList, Microventures, SecondMarket.

It will be interesting to watch how the JOBS Act crowdfunding element is implemented by small businesses as many of these crowdfunding companies are what is defined as “emerging growth companies” by the Act themselves.  Not only does this new source of accessing capital have the potential for spurring growth and creating jobs for small business, but for an entirely new set of jobs created by this crowdsourcing industry.