Crowdfunding the future

When President Obama signed the bipartisan Jumpstart Our Business Startups (JOBS) Act of 2012 into law, he called it “a potential game changer.” The Milken Institute agreed it was one of the most “momentous” changes in securities law since the Securities Act of 1933. But the slow rollout of regulations has prevented entrepreneurs from taking advantage of the most significant provisions of the law, including the use of crowdfunding websites to raise capital.

That may be about to change, especially with new regulations released in June and more expected by year-end.

Entrepreneurs raising capital can now do “general solicitations” for funds. Before the JOBS Act, entrepreneurs raising capital had to prepare (with some exceptions) complicated private placement memorandums, and they could distribute them to only a limited number of people. Those people had to be accredited investors: wealthy individuals with an annual income of more than $200,000 and a net worth of at least $1 million.

The “general solicitation” regulations, released last year, are already making a difference inside the venture capital industry, according to Bill Clark, the founder and president of Austin-based MicroVentures, one of the first crowdfunding sites. He called the new rules “very good for startups. They have allowed companies with customers and fan bases to communicate directly with them.” More regulations released June 19 allow companies to raise up to $50 million from up to 2,000 accredited and nonaccredited investors. Previous limits on both the amount raised and the number of shareholders were much lower.

Crowdfunding is not, of course, new. Artistic and creative projects have used funding sites such as Kickstarter and Indiegogo. Kickstarter, launched in 2009, is the largest crowdfunding site and has raised $1.5 billion for more than 200,000 creative projects. But that’s an average of less than $20,000 per project, and backers of Kickstarter projects don’t become shareholders. The promise of the JOBS Act—and equity crowdfunding in general—is access to a greater share of the public’s capacity to invest without the regulatory burdens and scrutiny public companies face.

But will it live up to that promise?

So far there’s been no stampede, in part because regulations have been so long in coming. The regulations that will allow online crowdfunding are still not out—due in part to evolving technology and vocal special interests. The AARP (the former American Association of Retired Persons), for example, fears “boiler room” operations will defraud the elderly into investing in worthless companies. Labor unions—including the National Education Association and the AFL-CIO—are also opposed.

Despite slow implementation, most observers still think the JOBS Act of 2012 is a big idea. “The changes are the greatest advancement for entrepreneurship in a generation,” Ron Miller, a Los Angeles venture capitalist, told the Los Angeles Times. Prominent supporters include the National Venture Capital Association, high-profile entrepreneurs Steve Case (AOL) and Mitch Kapor (Lotus), and crowdfunding microfinance sites such as Kiva.

Obstacles and opponents notwithstanding, equity investing via crowdfunding platforms seems inevitable and is likely to have a huge impact. More than 8 million people have backed Kickstarter projects, and the backers skew toward the young and digitally savvy. With so many people now experienced with crowdfunding, using this platform to invest in a company—especially a company they know and like—will be a natural next step.