The Small Business Watchdog

As the voice of small business in government, Advocacy invites you to post your thoughts on this moderated blog, provided as a forum for the small business community.

The Small Business Watchdog header image 2

Crowdfunding—Read the Fine Print*

April 12th, 2012 · 4 Comments

*The regulations, that is. The Securities and Exchange Commission (SEC) has 270 days from the bill signing to write the regulations.

It is common knowledge that innovation and entrepreneurship are critical factors for economic growth. There is even agreement that most innovation occurs in small business and startups, but capital for this critical sector of our economy is difficult to access. For first money, startups generally rely on their own resources and what has affectionately been referred to as FFF Funding (friends, family, and fools).

The size of the funding market for these smaller investments from friends, family, or other affinity groups is estimated to be $144 billion; this is larger than the amount of venture capital funding in the market.  With an unmet demand for capital for innovation plus an existing yet informal multibillion dollar resource, this begs the obvious question—What can policymakers do to ease access to capital for innovation while at the same time assuring the proper consumer protections against fraud?

Entrepreneurs and others have advanced the notion of crowdfunding as part of the solution to the dearth of capital for startups—in particular allowing solicitation over the Internet to defined communities of classmates, colleagues, or friends; and from lower dollar, “unaccredited” investors—those with less than a million dollars in assets. Recently, Congress responded with the JOBS Act (for “Jumpstart Our Business Startups,” H.R. 3606).  The Act allows both these things—and more. Small businesses and entrepreneurs will be able to raise up to $1 million in equity funding over the Internet through portals and websites that will be registered with the Securities and Exchange Commission. The bill was signed into law by President Obama on April 5.

I recently participated in a panel discussion about crowdfunding sponsored by the Maine Center for Entrepreneurial Development in Portland, Maine. There were innovators and entrepreneurs in attendance who were excited about the potential to infuse significant capital and energy into the innovation economy. Many had experience with KickStarter.com and other contribution-type websites (sites that amass contributions for shared goals/projects, without actual equity participation). Participants agreed that the addition of an investment opportunity along the lines of the crowdfunding model would bring more money to the table. At the same time, there were as many voices, even among the entrepreneurs themselves, cautioning about the potential opportunities for abuse and fraud posed by loosely regulated Internet solicitations to unaccredited investors (think massive spam, for starters).

The SEC has 270 days to write the rules that will govern these practices (the clock started ticking on April 5, when President Obama signed the bill). There are myriad issues, concerns and opportunities that must be taken into account. As always, for the regulators to strike the right balance the community who will be subject to the regs must be at the table and in the discussion. Stay tuned. Read up. Keep talking. And know that the Office of Advocacy will be listening.

—Lynn Bromley, Region I Advocate

Lynn Bromley is Region I Advocate for Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. You can reach her at lynn.bromley@sba.gov.

 

To Know More . . .
Dana Mauriello, a tireless supporter of crowdfunding and cofounder of the now defunct Profounder.com, based the $144 billion estimate on one of the GEM studies and another from Babson College/London Business School:
•  “What Entrepreneurs Are Up To,” Global Entrepreneurship Monitor, 2008 National Entrepreneurial Assessment for the United States of America, Executive Report.
•  “For Love or Money? A Study of Financial Returns on Informal Investments in Businesses Owned by Relatives, Friends, and Strangers,” by William D. Bygrave, Babson College – Arthur M. Blank Center for Entrepreneurship, and Stephen Hunt, London Business School. 

Tags: Regulatory Policy · State and Regional

4 responses so far ↓

  • 1 rlkrafft // Apr 13, 2012 at 10:21 am

    The time for input has officially begun. Here’s an SEC press release from 4-11-12.

    SEC Seeks Public Comment Prior to JOBS Act Rulemaking
    FOR IMMEDIATE RELEASE
    2012-60

    Washington, D.C., April 11, 2012 — The Securities and Exchange Commission today announced it will begin accepting comments from the public as the agency sets out to make rules required under the recently-signed Jumpstart Our Business Startups (JOBS) Act.

    http://www.sec.gov/news/press/2012/2012-60.htm

  • 2 rlkrafft // Apr 13, 2012 at 11:26 am

    Regulatory Alert: SEC Seeks Comments On JOBS Act Rulemaking

    On April 11, the Securities and Exchange Commission (SEC) announced that it now is accepting public input on its implementation of the newly enacted Jumpstart Our Business Startups (“JOBS”) Act, Pub. L. No. 112-106. The JOBS Act includes provisions that require the SEC to undertake various initiatives, including rulemaking and studies touching on capital formation, crowdfunding, disclosure, and registration requirements. The SEC is encouraging the public to comment on these issues even before the agency formally takes steps to implement the JOBS Act initiatives. The SEC intends to post on its website all of the comments submitted in response to the April 11 announcement.

    • Find the SEC Announcement – http://www.sec.gov/news/press/2012/2012-60.htm

    • Find the SEC website to submit comments – http://www.sec.gov/spotlight/jobsactcomments.shtml

    • Advocacy contact: Dillon.Taylor@sba.gov or call 202-401-9787

    For more information on Finance Regulatory Alerts see http://www.sba.gov/advocacy/815/7921

  • 3 The Venture Catalyst // Apr 17, 2012 at 4:28 am

    Highly relevant to what I was looking for. Thankyou.

  • 4 article writing service // Apr 23, 2012 at 6:29 am

    thanks for your wonderful article