Thursday, June 28, 2012

Start-Up Capital Democratized: Long Live Crowdfunding!

Back in 1997, the British prog-rock band Marillion was having trouble scraping up the cash to embark on a tour of North America.

This news quickly spread among the group’s devoted fans, who rallied – without the band’s knowledge – and managed to raise $60,000 to help finance the tour. Four years later, Marillion’s hardcore fans, known as “Anoraks,” financed the band’s 2001 record Anoraknophobia by pre-buying copies of an album not yet made.

Just over 10 years after the release of Anoraknophobia, this type of phenomenon now has a name: crowdfunding.  Crowdfunding is getting a lot of media and business attention and there are sites springing up weekly where people can finance start-ups, artists, community projects and charities. What’s unusual about crowdfunding though, is that until now it has only been legal if the funders had no expectation of financial gain. They could receive some sort of benefit-in-kind like an album for example, but it wasn’t considered a bona fide investment – until recently.

Thanks to our slow-jamming President who signed the JOBS Act (Jumpstart Our Business Start-ups in early April 2012), the Securities and Exchange Commission (SEC) is introducing rules that will allow almost anyone to invest in new companies – up to a total of $1 million per year – and receive equity in return, as long as the middleman rounding up the cash is SEC-registered.

The new rules should be in place by the beginning of 2013. This is great news, considering that in our down economy, it’s already difficult enough for start-ups to raise the capital needed for a proper business launch.

So hooray for crowdfunding! This is exactly what those entrepreneurs without access to traditional finance or VC funding need.

The legislators in Washington and suits on Wall Street tell us that the Great Recession is over. But considering the miserable jobs report we got last month, it’s clear that for too many Americans the financial pain endures without respite. Enormous numbers of our young people are graduating from college only to find that the job market simply doesn’t have a place for them.

So, what are many of them doing? They are starting their own businesses, of course. And already, corporations such as Fundable are gearing up to inaugurate investment vehicles wherein anyone with a little cash to spare can help a start-up get a foothold – in exchange for a stake, regardless of its size, in the company.

Let’s hope this democratization of start-up capital fulfills its promise as a fresh new way to support America’s next wave of forward-thinking entrepreneurs.  I’m all for that.

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