A new way to raise capital – Crowdfunding
Raising capital can be one of the most challenging and aggravating processes a startup ever faces, from the “one perfect angel” goose-chase to swallowing painful terms with a VC to suffering exorbitant legal fees, to name a few. What if startups could ignore the prohibition on general solicitation in the Securities Act and sell equity through Facebook, Twitter and LinkedIn?
Perhaps a cash-strapped entrepreneur’s deluded dream once upon a time, raising capital online, could soon be a reality: in a rare display of bipartisanship, the U.S. House of Representatives passed H.R. 2930, the Entrepreneur Access to Capital Act, on November 3rd, which will allow businesses to raise up to $2 million dollars a year in small investments (capped at $10,000 per investor) without having to do any filings with the SEC. Termed ‘crowdfunding,’ the process is similar to such age-old traditions as bake sales, car washes and beer runs, where several people pitch in a small amount of money to get a project off the ground. The big difference in H.R. 2930’s case is that instead of offering a service or product in exchange for money received, companies will be selling equity to get their idea off the ground. This new avenue for capital could significantly change the fundraising atmosphere by decentralizing the process and making investments in startup ventures accessible to the general public.
The bill is currently in the Senate where it is expected to pass and President Obama has already issued a statement of support for the legislation. The SEC will have 180 days to issue rules on the legislation once it is signed into law. While many are excited at the prospects of the Entrepreneur Access to Capital Act becoming law, the bill is not without its downsides: investors will be vulnerable to scams and may underestimate the huge risks involved in trying to fund “the next Facebook,” while startups risk being overwhelmed by the administrative costs of responding to dozens, hundreds or even thousands of legally-protected shareholder inquiries. Whether crowdfunding revolutionizes the startup environment with a large and more diverse pool of capital or turns out to be another half-baked job creation idea out of Washington D.C. remains to be seen, but either way, it appears we are about to find out.
Posted by GeoffreySechter, Data Analyst on 30 December 2011