U.S. Entrepreneurs Need Crowdfunding To Create 1.5 Million Jobs

Diane Dolinsky-Pickar's picture

If politicians can crowdfund their campaigns, then why can’t American businesses use crowdfunding to gain investment? The reason is securities laws that haven’t kept up with the Internet age, but hopefully, that is about to change.

The Crowdfund Investment initiative (CFI) will come up for a vote before the Senate shortly, and it needs to be passed. While this initiative enjoys bi-partisan support as well as the endorsement of President Obama, it is far from a done deal. Currently, there are deep negotiations going on in Washington as to how this bill should proceed and what the specific language ought to be. Job creators and nonprofits such as Startupexemption.com and Legalizecrowdfunding.org are working closely with politicians to help the players coalesce around a consensus and get legislation passed.

If a bill were to be passed by the Senate, the last step in the legislative process, this would be a historic milestone in how capital can be acquired in this country, making it profoundly easier to fund startups. The increased access to capital and the boost to competition will be good for U.S. businesses, and by extension, a boon to job creation.

One study that was commissioned to quantify the potential over the next five years if CFI were passed concluded that up to 500,000 companies could be funded and 1.5 million jobs created. So why is crowdfunding controversial? It boils down to fear of change.

As the stock market improves, there is a unique opportunity to democratize who can invest in startups and how they make that investment

This is a historic time for the U.S. economy, as innovative ideas need a regulatory environment that is favorable, in order to take off.

The stock market is improving, as the NASDAQ reached above the 3,000 mark on March 13, 2012, its best performance since the dot-com bubble. The NASDAQ’s former high point came on March 10, 2000, underscoring how it has taken 12 years to partially claw back to its apex.

At the same time, mass media has changed dramatically and with the widespread advent of social media, the internet has given rise to sites like Kickstarter, IndieGoGo and RocketHub . At these sites, entrepreneurs and small business get capital via donation-based crowdfunding. In the legal sense, they are not really accessing investment, they are accessing “donations,” which stands in contrast to what would be if people expected a return on their investment.

Put slightly differently, when someone makes a pledge to put up $500 or $1,000 towards a specific project posted online at Kickstarter or its competitor sites, they are viewed as community-minded funders akin to charity donors, by the law. They are not considered investors. They do not get a financial payoff for the money that they pledge for products or programs, despite the “levels” of giving that are touted, or the “gifts” that can range from bags of cookies to copies of CDs.

For ambitious startups, however, constraints to raising capital are a serious impediment in the current age of social media and web-based conversations.

Regulatory constraints were put into place in the 1930’s in order to protect small investors from fraud. As a result, in order to access capital, the only route for innovative companies involves outreach, negotiation and partnership with angel investors and other intermediaries possessing access to high net worth individuals and private placements.

Greatly simplified, current laws do not allow entrepreneurs and innovators to acquire investment from more than 35 people who earn less than $250,000 per year or whose net worth is below $1 million. Small businesses and startups cannot offer equity to relatively unqualified investors in the public domain. Although internet sites are privately held, the fact that anyone can sign up, participate in conversations, add to the comments and share the experience, puts them in the “public domain” by the letter of the law.

Crowdfund Investing would make equity-based crowdfunding legal. It would facilitate the ability of entrepreneurs to raise money from family, friends and associates in his or her community, within a framework that provides investor protection.

According to Time online, Kickstarter expects to distribute $150 million dollars in 2012, which means money flows from that site alone exceed the budget of the National Endowment for the Arts. But this is considered philanthropy, not investment.

Is it fair that regular folks can donate their money as they wish, but not invest it for profit? Seems patently undemocratic, doesn’t it?

Based upon the 2% of entrepreneurs that actually access traditional sources of funding, Startup Exemption estimates that 97.7% of innovators and their startups have no where to turn for capital. Therein lies the potential for tremendous gains in entrepreneurial activity and job creation, if other channels of capital formation were legally accessible.

Current logjam in the Senate over the Crowdfund Investing initiative

America’s entrepreneurs need Crowdfund Investing, which is part of the JOBS act. On March 8, 2012, the U.S. House of Representations took 6 of the Capital Formation bills that passed with almost unanimous bipartisan support (including Crowdfund Investing), packaged them together into one (called the JOBS Act) and passed it again with overwhelming support. President Obama then endorsed this House-led initiative.

It is apparent from this unified action that many politicians in Washington comprehend that Americans want to support innovation, entrepreneurship and employment.

But the initiative languished in a committee of the Senate until recently, when Senate Majority Leader Harry Reid agreed to bring it to a vote, which is scheduled to take place shortly. The Press Office of Senator Reid would not confirm that it has been released, but off the record, this reporter was told so.

Efforts to share information regarding potential crowdfunding among the players continue today in Los Angeles

The SoHo Loft organized a two-day conference that continues today, March 14, 2012, to introduce attendees to the players in the Private Company Marketplace (PCM), including the private shares desks and exchange platforms, crowdfunding experts, secondary private share buyers and angels, analysts and entrepreneurs.

The conference features speakers from a range of perspectives. Jason Best, Co-Founder of Startup Exemption, pointed out that when entrepreneurs wish to share ideas, thoughts and freely comment on each other’s proposals, social media is the obvious platform to foment conversation. But until the regulatory environment catches up to the protocol needed, in 2012, potential investors are shortchanged from judging and investing in the best ideas, and startups themselves are unnecessarily restricted in the ways they can access capital to expand their business.

Sherwood Neiss, Co-founder of Startup Exemption remarked, “If we get that passed, it would be the biggest accomplishment pertaining to funding entrepreneurial ideas in the United States, that has happened over the last 50 years.”

Photo courtesy of Startup Exemption

Comments

Submitted by Conflux (not verified) on
This is certainly a very interesting article, one that's indeed timely - there's a thick/heavy buzz around crowd funding. I was eager to find out what the parameters for crowd funding are and somehow, either didn't find it or missed them altogether. What do I mean by parameters? Things like how crowd funding is expected to be organized, who is accountable for a contribution made to the fund? Is there an expected payback? Is a contributor part owner (meaning shareholder) of the entity into which the fund is invested? In short, how is it supposed to work? I guess, I could visit Kick-Starter's website or their competitors to find out how they are structures.

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