A Very Simple Explanation of Why Crowdfunding Matters

Crowdfunding will change the world. 

Crowdsourcing (the act of giving money to a person or business through the internet in exchange for social good or an item to be delivered later) is already here in this country.  See www.kickstarter.com.  The next level is what is known as securities crowdfunding, or investment crowdfunding, or simply “crowdfunding.”  That is the act of giving money in exchange for debt or equity stake in the business. 

A recent article on Forbes by Devin Thorpe makes clear the colossal growth in funding.  Based on the recent study by massolution, funding given for crowdsourcing projects was $1.5B in 2011.  It is expected to double to $3B in 2012.  Oh, by the way, it is expected to increase by 16,566% to 500B in 2013.  While I haven’t seen any numbers directly on the U.S. market, it is hard to argue that the majority of this growth can be attributed to the approval of securities crowdfunding in the U.S. market.

Simple enough for you?


Regulation D Versus Crowdfunding

Comparison of Private Funding  
Regulation D (506) Versus CrowdFunding  
  Regulation D CrowdFunding
Potential Investor Pool 2,500,000: Accredited Investors 300,000,000:  Everyone                                   
Total Number of Investors Allowed Unlimited Unlimited
Raise Amount Unlimited Up to $1,000,000
Individual Investor Annual Limit Unlimited $2,000 without restriction; 5% for income/NW between $40k and $100k; 10% above $100k (max investment of $100k)
Required Intermediary No Broker-Dealer or Funding Portal


How Can My Business Use Crowdfunding?

The most common set of questions on this topic relate to how specifically a business might take advantage of crowdfunding.  The truth is that crowdfunding is nothing more than a way for your business to get more capital.  So you use the money however you want to use it – provided that you can sell it to potential investors and you are truthful with the investors about how you spend it.  IF YOU ARE NOT SATISFIED WITH THAT ANSWER, then give me a hypothetical and I will give my thoughts specific to that specific example…  For instance, say – I am a photographer, how would I use crowdfunding?

Private Equity Solicitation Rules Proposed by SEC

While not specifically related to crowdfunding, Title II of the JOBS Act (of which crowdfunding was Title III) is the big brother of crowdfunding.  Reg D is how private equity works right now.  Title II permits the general solicitation for investments in Reg D offerings, which should make these much more prevalent.  In plain English, prior to these rules being adopted, those looking to raise money through Reg D offerings (which are by far the most common type of private equity money) could only ask those investors with which they (or their representative) had a prior relationship.  As soon as final rules are adopted, issuers can solicit from anyone, provided that they take reasonable steps to ensure that the investors are accredited (see rules for accreditation here:http://www.sec.gov/answers/accred.htm).  The proposed rules were approved by the SEC on Wednesday.  Find them here: http://www.sec.gov/news/press/2012/2012-170.htm.  69 pages of rules that set up a “check the box” process if you want to generally solicit.  The big issue has been the extent to which issuers have to “ensure” that investors are accredited.  It looks like there won’t be a safe harbour for that – which some people may not like – but the standard will still continue to be “reasonable belief,” which most people will love.  Good news is that the SEC played with kid gloves on these rules – maybe they’ll do the same with crowdfunding.

Where crowdfunding began…

A group called the “Startup Exemption” were the ones who went to Washington to lobby Congress and the President for securities crowdfunding.  They put together a blog post called “Crowdfunding 101” which is definitely worth a read to get an idea of their thought process as they were passing this legislation through.

Remember – this is old information – but it is THE HISTORY of crowdfunding from the founders, so I think it is incredibly insightful.


A brief description of crowdfunding (discussion format)

I am a small business attorney in Lakeland, Florida.  Far away from Silicon Valley.  I see the importance of crowdfunding on a daily basis.  Businesses need funds.  Banks need collateral that businesses don’t have.  Crowdfunding is a way for small businesses to raise money from the crowd – everyone.  To get that money, the business (issuer) must prove its case to the person giving it money (investor).  Prior to January 1, 2013, the United States did not permit securities crowdfunding, that is the investment by the crowd in exchange for a promissory note (debt) or stock/ownership (equity).  The JOBS Act, passed in April, changed that.  Find out how (the Real Story) in my interview with Mark Wallace on Seeking Alpha: http://seekingalpha.com/article/644281-crowdfunding-the-real-story