Crowdfunding Evolution

Although not yet a legal term found in the books or the dictionary, “Crowdfunding” has surely become one of the most popular phenomenon in the United States today. It has drawn so much attention over its short history because crowdfunding was started to support charitable causes for social issues such as homelessness, poverty, and education. But over the past two years, not only has crowdfunding sparked the qualities of hope and compassion in our society toward these issues; but it has also provided a platform for entrepreneurs to raise capitals for businesses. In fact, according to Massolution – a crowdfunding research firm, $2.7 billion were raised in 2012 alone to fund more than 1 million campaigns. Furthermore, Massolution also predicts that crowdfunding efforts could increase up to $5.1 billion dollars worldwide in 2013.  

I think it’s safe to say that the phenomenon of crowdfunding has become an actual business industry to look out for. But like every other dynamic change in the business world, new invention means new regulations. Crowdfunding has certainly met its challenges over the past few years, and the adjustments are not quite over yet.

Just over a year ago, Obama signed a legislation called the JOBS (Jumpstart Our Business Startups) Act, which aimed to allow small business to access capital easily and to generate more jobs. Prior to the JOBS act, crowdfunding was restricted to businesses and entertainers that accepted donations in exchange for perks such as t-shirts or autographed posters. This was what made crowdfunding projects such as the “Veronica Mars Movie” and Zach Braff’s “Wish I Was Here” so successful; while startup businesses haven’t been as lucky. The JOBS Act entailed provisions that were about to change everything for these startups. That is if the SEC would amend and release its laws first.

Now, after more than a year of waiting, the SEC has officially made an announcement on July 10th, 2013 to implement The Access to Capital for Job Creators Act, lifting the SEC regulatory ban on private offering advertising. Soon, startups with venture capital funds, private equity funds or hedge funds will be able to market products and stocks through a variety of platforms (such as TV, radio, and social media). Prior to this Act, crowdfunding did not allow any type of advertising except to direct investors to the appropriate broker or funding portal. This act will now allow more transparency for accredited investors to invest in young companies.

Another provision that was placed into effect immediately was The Reopening American Capital Markets to Emerging Growth Companies Act. This law qualifies a business with total gross revenue of less than $1 billion in its most recent fiscal year as an “emerging growth company”, thereby allowing such businesses temporary relief from SEC regulations to go public with their companies.

But regardless of these two changes, there are still concerns that need to be addressed until the SEC rewrites other provisions into new laws. For instance, a company can only raise $1 million in any 12 months period, and the amount of money a person can invest in all crowdfunding efforts in a year is restricted to 10% of his or her annual income or net worth (incomes of $100,000 or more) or the greater of $2,000 or 5% of annual income or net worth (incomes of less than $100,000). In addition, not only do these new businesses have to fill annual reports with the SEC just like the rest, they may also have to file more frequent reports as they complete a crowdfunding round (depending on future SEC regulations). Think about it. Does the burden and cost of taking on the legal liability and comply with so many filing requirements outweigh being able to raise a maximum of $1million dollars a year? Until new amendments have been made to the SEC laws, equity crowdfunding may not be the best option to go with just yet.

Furthermore, crowdfunding must be done through a registered broker-dealer or registered “funding portal.” Since broker-dealers and funding portals are not allowed to solicit investments, give advice, or pay employees based on sales, traditional investment banks have yet to jump on the crowdfunding movement. This has allowed lesser-known institutions with minimal track records to take over the market and facilitate most of the activities, and the idea of working with institutions with little investment track records have become a concern.  

With so many restrictions and speculations that are still up in the air, some companies are actually finding that it is more economically feasible to file for an IPO rather than go through the crowdfunding route.

What are your thoughts on the crowdfunding progress?

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