“There will be a
significant number of equity-based crowdfunding platforms in the next years --
probably hundreds and hundreds,”says Carl Esposti, the founder of the Los
Angeles-based Crowdsourcing.org.
The crowdfunding
provision was just one of several in the JOBS Act (named for the acronym for
"Jumpstart Our Business Startups") aimed to make it easier for small
businesses to gain access to capital, grow and hire. Crowdfunding is a way of
raising money that involves securing small sums from a large group of
individuals. In recent years it has become more mainstream thanks to the likes
of websites including Kickstarter, Indiegogo and Kiva.
The soon-to-be law will
allow entrepreneurs to raise money from nonprofessional investors and give away
equity stakes in exchange. Until now, crowdfunding has been used mostly to
raise funds for artistic projects. (Think: Record a music album.) Project
leaders offer perks (perhaps a tote bag or autographed CD) in exchange for
donations. Businesses have been able to "crowdfund" in exchange for
equity, but only among accredited investors (such as angels) with more than $1
million in assets, excluding the value of a primary residence.
“It clearly has an
enormous potential for new capital formation,” says Esposti. “There is no doubt
that it will create a new way for smaller organizations to raise capital very
quickly and more cheaply.”
Going forward,
crowdfunding sites will have a decision to make about their structure. Those
that want to allow businesses to raise money by selling equity to investors
will have to register with the U.S. Securities and Exchange Commission. The SEC
has 270 days from when the legislation is signed to establish rules.
San Francisco-based
crowdfunder Indiegogo is still deciding whether to register, according to CEO
and co-founder Slava Rubin. “We need to make sure this works for our
customers,” he says. New York City-based Kickstarter, the largest
donation-based crowdfunding company according to Crowdsourcing.org, declined to
comment.