What is crowdfunding?
Crowdfunding is the process of raising capital through soliciting small contributions from a broad group of people.
As the arena grows, there are 2 main headlining flavors of crowdfunding:
1. Crowdfunding for Donations. A number of websites have successfully created a platform for crowdfunding on a donation basis. For example, KickStarter, IndieGoGo, RocketHub are established platforms allowing individuals to make donations to fund small projects. Similar new platforms in the space focus on niche areas such as making a donation for civic projects (CivicSponsor) or funding conscious media (LoudSauce).
2. Crowdfunding for Investment. Start-ups and small businesses may seek to raise capital using crowdfunding in addition to or in lieu of contacting investment firms or accredited investors. There are a number of laws surrounding such transactions and start-ups are advised to contact an attorney to make sure that there’s no breach in securities law.
What current law says about crowdfunding for investment
Set up a website, create profiles for social ventures, set out terms of the small investments and returns, let individuals small amounts in social start-ups, and you’re set to crowdfund investment, right? Wrong.
The Securities and Exchange Commission (SEC) has strict rules around who can invest in small businesses and start-ups. On the whole, small private businesses seeking funding are required to register securities with state and federal governments—a process that can be pricey and time-consuming.
As a result, small private businesses tend to solicit “accredited investors”, wealthy investors, who can more easily invest in private start-ups. There a few ways to try to steer clear of compliance issues, as were outlined at the Green Business Academy.
Crowdfunding petition submitted to SEC
To facilitate crowdfunding for investment, a petition for rulemaking was submitted to the SEC in July 2010 (see petition PDF) by the Sustainable Economies Law Center. The petition sought to:
- create new exemption for securities offerings up to $100,000, with a limit of $100 per investor
- exempt securities offerings up to $100 from Section 5 registration and from the extensive requirements imposed on exempt private and small offerings
New crowdfunding law proposed, the Entrepreneur Access to Capital Act
- creates new exemption for annual aggregate individual investments of up to lesser of: (1) $10,000; and (2) 10% of investor’s annual income.
Obama White House in Support
“In the President’s September 8th Address to a Joint Session of Congress on jobs and the economy, he called for cutting away the red tape that prevents many rapidly growing startup companies from raising needed capital, including through a “crowdfunding” exemption from the requirement to register public securities offerings with the Securities and Exchange Commission.”
The legislation recently cleared The House Financial Services committee, and is due for a vote in the House floor later this week.
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