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Crowdfunding Legislation Could Be Boon to Entrepreneurs

keith-larsonby Keith Larson

 

A relatively new way to finance a new or existing business is “crowdfunding” (aka “Crowd Sourcing”). It is basically an upgrade of the old-fashioned method called “family funding”. Instead of making a personal pitch to a rich uncle it makes use of the internet to solicit small “donations” from many individuals. As with the uncle, the investors know they may never get their money back. Often the entrepreneur will offer items or services from the project being funded. Sometimes the solicitor will place a time and value limit to the donations in which all pledges are voided unless the threshold amount is reached before the deadline.

 

There is a catch however: It may be illegal. The Securities Act of 1933 allows only “accredited” investors – those with a net worth of at least $1 million or annual salary exceeding $200,000 (the “1%”) – to invest in risky ventures. At a time when traditional funding sources have dried up and foreign competitors are eating our innovative lunch, this anachronistic law is an unnecessary obstacle to improving our economy and creating jobs. To address this situation, In November 2011, the U.S. House of Representatives passed H.R 2930, the Entrepreneur Access to Capital Act. It sailed through on a wave of government and public support. Soon after, the Democratizing Access to Capital Act was introduced in the Senate (S.1791). These bills have to merge to make the final law, but both move towards a standardized, regulated and safe process for investing that weeds out the swindlers and puts in some needed federal oversight. Both bills limit the overall contributions to an enterprise at $1 million in any 6-month period, while the Senate bill would cap investments at $1,000 per person. As usual, the senate process is much slower and the bill is still in the committee stages.

 

In the meantime, the promoters of crowdfunding use a tactic they believe gets around the legal problem: they refer to the opportunities not as businesses but as “projects”. Scott Wilson in Chicago needed $15,000 to fund his “project” of developing a wristband for holding the Ipod Nano. Posting it on KickStarter, he didn’t just receive $15,000. Instead, over 13,000 donors coughed up $942,000 in return for a wristband each. Another example: Fargo Brewing Co., a local watering hole in Fargo, N.D. wanted local investors to have a stake in the place, figuring (correctly) they would more likely patronize it and even be proud to bring guests there. In return for a donation the investor gets head-of-line privileges and a free beer. A third example: According to Dana Mauriello of Profounder, a start-up shave ice store in Hawaii raised $50K through the Profounder website. When they had problems with the construction contractor they immediately notified the investors they would not open on time. An investor stepped forward, found another contractor and put them back on track.

 

There are many websites that offer crowdfunding services, including the largest Kickstarter.com, Investedin and SEEDUPS.

 

Keith is one of 30 SCORE experienced volunteers providing FREE business counseling in the Inland Empire. To make an appointment e-mail k.larson@cox.net or SCORE503@netzero.net or visit www.inlandempire.scorechapter.org/