For a quick recap on how crowdfunding works, it essentially involves large numbers of people contributing relatively small amounts of money to fund a project they find interesting, believe in, or simply think is a good idea that deserves a shot. Websites like Kickstarter, IndieGoGo, RocketHub and others allow us to post our project on their sites in order to solicit support, and we can then use social media and other channels to tap our supporters, friends, family and so on.
So if I’m a music artist and want to record a new album, I create a great pitch video and description of my project and why people should support it. If successful, a bunch of people will pledge, say $20, and I promise them they will be the first to receive a copy of the album. For $50, I might send them an autographed copy and a poster, and so on. The offerings are up to me, and they need to be compelling enough to cause people to offer their support.
So here’s the change. In the case of the album as noted above, the person pledging $20 gets a copy of the album in a CD or download, but that’s it. They don’t own a piece of the new album. It’s strictly a contribution, and an exchange of a prize for that contribution – pretty simple and clean.
Well last year (2012) Congress passed and the President signed into law the Jumpstart Our Business Startups act, or simply the JOBS act. Among the provisions of the act are changes that will allow entrepreneurs seeking funding to advertise publicly under certain conditions and regulations (something that is not currently permitted) in an effort to spread the word to qualified, “accredited” investors. But in addition, the JOBS act provides for equity crowdfunding – the ability to use crowdfunding to attract investors who will actually own a share of the project or business.
As you will note in this article from CBS news, there are many issues and limitations, which will no doubt mean that equity crowdfunding has some huge hurdles to clear, but fortunately the states are becoming actively involved, as state and local politicians realize the potential this type of grass roots investment can have in the creation of small businesses and the many jobs that could mean for their state.
This will be a topic to watch very closely in the years ahead.