In a prior post I shared a brief glimpse of what changes in regulations currently in development could mean for funding for projects, real estate, startups and other similar ventures. This important shift comes as a result of the J.O.B.S. Act, legislation passed by Congress and signed into law by the President in 2012.
With a slightly different focus that the acronym might suggest, the full name is the Jumpstart Our Business Startups Act, and the focus on the legislation is on helping new business ventures get started. This is an extension of a previous government initiative called Startup America.
The idea is to remove obstacles to new business formation. In addition to attempts to reduce business regulations, and obvious stumbling block for entrepreneurs has always been the lack of access to capital for business startups. As we have covered many times on this blog, bank financing is virtually nonexistent for new businesses, with banks waiting until new businesses have a solid track record of success. Or as we have joked previously, banks will finally offer to loan you money, once you are able to demonstrate you don’t need it!
We are all familiar with crowdfunding as a concept, and many of you reading this are no doubt aware of the most popular crowdfunding websites, such as Kickstarter, IndieGoGo and RocketHub, to name just a few. With these sites, entrepreneurs can use social media to tout their creative projects to a broad audience, in hopes that a large number of people will ante up a small amount of money, resulting in full funding of the proposed project or venture. In each case, the participants become willing donors, and the only thing they receive in return for their pledge is whatever you promise to deliver. The easiest example is an artist looking for funding for a new album. For a pledge of $20, you might offer to send a CD, and for $50, a CD and an autographed poster – whatever you think will provide sufficient incentive to gain contributions.
For this type of crowdfunding, the donors don’t participate in the success of the project and have no stake in ownership. Equity crowdfunding, as outlined in the JOBS Act and under the regulations currently being developed, will allow “the crowd” to own equity in a venture, participating in any profits, but also suffering any losses, potentially including the loss of the entire investment. Unlike a crowdfunding donation, in this case the participants have a piece of the pie.
Since we all know that the majority of new business ventures fail, equity crowdfunding is very risky business, and that is one of many reasons it has taken so long to develop the regulations and protection that must be in place to prevent fraud and abuse. But the upside is also obvious. If a community sees the need for a new business, it can tap its residents to fund it. If we need funding to create a hot new product or service and it is ultimately successful, everyone wins. But if an unscrupulous scoundrel dupes us all and runs off with our money, well – you get the idea.
I honestly believe that equity crowdfunding will eventually emerge as a real game-changer for entrepreneurial ventures – a truly revolutionary tool that will see the launch of thousands of small businesses. Many will fail, but others will rise to the occasion and unleash our entrepreneurial spirit.
So what can you do? Start by educating yourself. Some great websites to check out include Fundrise.com and EarlyShares.com. There are many others and more on the way, but you will learn a lot from a little online research and clicking around to learn how this will work. This will really be a trend to watch closely in the years ahead.