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Crowdfunding is about to expand past its small-startup roots

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Crowdfunding is about to expand past its small-startup roots
Jun. 29, 2012, Julie Sickel

Ashley Martz bought essentials to run her own children's boutique. Terry Clarkson and his son, Adam, sold more than 300 of their specialty clocks. Adam Gross and his bandmates immortalized the voice and creativity of a deceased friend. For these Indianapolis-area entrepreneurs, none of it would have been possible without the Internet phenomenon of crowdfunding. Crowdfunding allows the average inventor, entrepreneur or creative type to pitch projects on specialized Web sites and persuade total strangers to donate money to the cause. For now, it is mostly limited to small projects that have progressed slightly beyond the hobby stage.

But a new law passed in April soon will remove regulatory barriers and allow larger ventures to sell ownership interest to investors through crowdfunding Web sites. Under the Jumpstart Our Business Startups Act, companies could raise as much as $1 million through crowdfunding in a 12-month period. But they would need to register and work with an intermediary approved by the Securities and Exchange Commission. Before any of that can happen, the SEC must draft regulations that would organize the process and determine how much each company seeking crowdfunding must reveal about itself. "If you're a company that wants to raise money from the public, ordinarily you'd have to provide (financial) information," said SEC spokesman John Nester. "In this case (of crowdfunding), you would have to provide less information." The SEC's regulations likely won't be completed until at least January, but there's already one provision in the law that demands some financial disclosure. Companies that raise more than $500,000 through crowdfunding would have to release audited financial statements. Despite those requirements, some officials still worry about the opportunity for fraud. Last month, Indiana Secretary of State Connie Lawson urged Hoosiers to do their homework before investing. She said crowdfunding holds the potential to work as a fundraising tool for legitimate startup businesses, but "there is also great potential for fraud."

Lori J. Schock, director of the SEC's office of investor education and advocacy, has responded to such concerns by pledging her office would diligent in watch for fraud once crowdfunding is expanded. The expansion should help fill some gaps for small businesses and investors, said Jean Wojtowicz of Cambridge Capital Management Corp. "Small amounts of money under a million dollars are typically hard to raise," she said. Some angel investors might shy away from investing in companies that use crowdfunding, but she doubts it will affect their appetite to invest in other things. Meantime, smaller ventures already have found a way to make the most of crowdfunding. It was the one financing option that made it possible for Martz, the children's boutique owner, to buy a computer and other equipment needed to run her shop. "It was the thing that allowed me to make this happen, to be able to take on the store," said Martz, owner of Nurture boutique, 433 Massachusetts Ave. "I think it's a great alternative, especially given the fact that banks aren't as open about lending to small businesses as they've been in the past."

Summary
Under the Jumpstart Our Business Startups Act, companies could raise as much as $1 million through crowdfunding in a 12-month period. But they would need to register and work with an intermediary approved by the Securities and Exchange Commission.

Description
Some angel investors might shy away from investing in companies that use crowdfunding, but she doubts it will affect their appetite to invest in other things.

Meantime, smaller ventures already have found a way to make the most of crowdfunding.

It was the one financing option that made it possible for Martz, the children's boutique owner, to buy a computer and other equipment needed to run her shop.

Tags: crowd funding, Crowdfunding, Crowdsource, Crowdsourcing, Jobs Act, US President Barack Obama

Posted by Fritz Schaefer

Jul 01, 2012 03:14 pm GMT Viewed 979 times

Author: Julie Sickel Source

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