Decentralized Investing – The Rise and Implications of Crowdfunding
What does an investor look like? The description is about to change drastically in the coming years.
This week the Senate passed the JOBS Act – a bundle of various efforts to enhance the small business and entrepreneurial efforts in the U.S.
From Cathleen Clifford over at Entreprenuer.com, the JOBS Act bundle includes the following:
- The Reopening American Capital Markets to Emerging Growth Companies Act would make it easier for companies to go public by allowing them temporary relief from certain U.S. Securities and Exchange Commission (SEC) regulations.
- The Access to Capital for Job Creators Act aims to help small companies raise capital by removing a SEC regulatory ban that says small businesses cannot use advertisements to attract investors.
- The Entrepreneur Access to Credit Act also claims to ease entrepreneurs’ efforts to raise capital by eliminating SEC restriction on “crowdfunding,” an increasingly popular way for small businesses to raise money from a large pool of individual investors.
- The Small Company Capital Formation Act would help small businesses go public by elevating the threshold of companies that are exempted from SEC regulation to $50 million from $5 million.
- The Private Company Flexibility and Growth Act is expected to give small companies more room to grow before having to go public by expanding the shareholder limit for registration with the SEC to 1,000 from 500. The current SEC regulation asks many small companies to purposefully impede their own growth or force them to look for buyers when they start hitting up against the current regulatory roof.
- The Capital Expansion Act would increase the number of shareholders allowed to invest in a community bank to 2,000 from 500, as is currently dictated by the SEC. The goal is to reduce regulation that community banks, some of the biggest lenders to smaller businesses, have to deal with allowing them to spend more time making loans.
You could write all day about the legislation – it is the topic that keeps on giving: Whether or not this will create jobs, schisms between the old school and new in congress around what “jobs” look like, that it is too focused on High Growth Companies. All fascinating, but most interesting of the provisions has even larger, global implications – Legalizing the Concept of CrowdFunding
For anyone who does not recognize names like Kickstarter, Kiva, and RocketHub, or terms like CrowdSourcing and Inchvesting it is time to take a look at the rising new mechanisms for raising money. Wikipedia has a good overview of the concept/history of CrowdFunding and CrowdSourcing in general.
In the U.S. you are currently unable to actually be an investor via the CrowdFunding model, however in the past couple of years its power can be seen various not-for-profit efforts like Presidents Obama’s small donor network, filmmakers & musicians receiving group-based financial support, international social investments, and a billion other interesting projects.
While many want to ignore the conpcet entirely, CrowdFunding is absolutely booming and is here to stay. In the coming years, Congress and the SEC must continue to evlove a new set of rules around CrowdFunding – Eliot Spitzer is correct is arguing for more oversight and protections. As expansion happens it will be critical to enhance financial disclosure requirements, fraud protection, and limits of sourced investment. Oversight of innovation something neither body has been especially adept at recently.
And yet the potential here is exciting. At Reluminati we have helped a variety of non-profits, artists, and filmmakers navigate this world and get the funding they have needed. Not from a single institutions, but from 50 – 500 small personal donations. People just wanting to support creative ideas. There is something so tangible, so accessible, so empowered about this form of investing – I can’t help but be excited.
It is a force to be reckoned with – seemingly only now just being recognized.
Snake Oil will inevitably be part of the maturation process. It will take time to ensure that this new investment mechanism isn’t a new and equally disastrous entity that is hidden in back alleys and shadows (See: “Credit Default Swaps”, or “Lack of Moral Compass”). You will not often hear this, but I was pleased to see the Senate slow down passage of the JOBS Act and work out an amendment to place further restrictions on the amount of money that can be raised per year.
Not perfect, there is more work to be done with regards to oversight. But this is a decentralized system that has the potential for incredible power – just another part of the world experimenting with distributed architecture with the potential to re-empower a society that has lost faith in its financial institutions.
And as optimists, that is what we should take away from the rise of CrowdFunding.
Tags: Crowdfunding, JOBS Act, Kickstarter, SEC, Sharing Economy