Introduction
Crowdfunding is a method to raise funds through the internet by seeking investors online who can invest a small amount of money. This is done through social media sites to help small businesses or budding artists. Usually, donations can be made to a favorite cause or business and then receive free things weekly, but then no share of stocks is provided. This is because the company is not registered with the Securities and Exchange Commission (SEC) that regulates the issuance of stock.
The increasing popularity of the internet as an easy and inexpensive way for small businesses and entrepreneurs to raise funds urged President Obama to sign into law the Jumpstart Our Business Startups (JOBS) Act on April 5, 2012. It contained a series of legislative provisions required for the formation of capital in the United States. Crowdfund Act was a part of this legislation which would have led to significant changes in state securities laws. According to this Act, the SEC was to create rules that exempt crowdfunding from the securities laws (Kaufman, 2014). Once these rules are implemented, the start-up companies can seek investors over the internet without any restrictions. Until the SEC does not complete its regulations, this form of raising funds remains illegal if practiced nationally.
It has been more than three years, the small businesses are still waiting for the SEC to finish writing the rules. Now the State agencies that are tired of waiting, have taken the matter into their own hands and are passing their own equity crowdfunding laws so that at least the local businesses can benefit from this method (Cormick, 2015). Twenty four states have already enacted these rules and eleven are considering creating these rules. (Intrastate Crowdfunding on Wikipedia)
Rules
There are two ways to invest. Traditionally, broker dealer firms provide assistance in choosing the best investment options. Another way is investing through a funding portal that is only allowed to advertise investment options and facilitate transactions but cannot provide investment advice.
Consider a local theatre that is catering to the needs of many local people. Since they are low on funds they can seek donations through the internet from people who are not expecting anything in return. As a thank you for the donation, the theatre administration can send free movie tickets. If the SEC rules are written, then the local theatre can sell investments in their company and thus raise up to $1 million every year. This will mean the public investing will become investors. An investor will be able to invest up to $2000 every year but not more than $100,000 (Perlmutter, 2014). The exact amount will be determined depending on the investor’s net worth and income.
Investors
The public should be skeptical of investing in startups through the internet. Firstly, the investor should be sure if their State has made Intrastate Crowdfunding legal or not. If not, and there is a local business advertising, then it is a scam. He should be cautious no matter where they see the offering and wait till its proven that it is not a scam. The issuers on funding portals do not have their records proven. Therefore, it is required that a thorough research be carried out before taking it a step further. Also, a study shows that most of them fail in less than five years and the investor should remember that they have limited legal ability against any business. So, he should invest smartly. Lastly, the investor should be sure that the funding portal he is using is registered with the SEC only and has their seal of approval. No other body is allowed to register funding portals.
Issuers
This method of fundraising can be risky for the issuers also. The issuer must also be sure whether his State has legalized this form of raising funds or not. If not, then he should wait until either his State legalizes Intrastate Crowdfunding or the SEC writes the rules. Secondly, the funding portals should be chosen wisely. There are many over the internet that take up fees now and may be fraudulent. So, the issuer must be sure that the funding portal is following the SEC rules. Thirdly, the business is only exempted from registering with the SEC but it does not change the fact that they have to adhere to the securities law disclosure requirements. They are required to disclose the risks involved and all material facts to the investors in the first place.
There are many other ways for a company to gather investment therefore they need to chose the best and inexpensive way. Crowdfunding may be expensive than some of the other ways. So, the issuer can contact his state securities regulator to gather more information on different ways possible to raise funds. The bottom line is that the issuer should get a professional to help him in determining the most appropriate way to follow that suits their current situation.
Conclusion
The Crowdfunding Act, a part of the JOBS Act, is a controversial matter given what is at stake. Critics of the Act keep focusing on concerns over investor protection that have been passed on from the time of the Great Depression. They need to understand that times have changed. Equity Crowdfunding has been made possible through the recent advancements in the technology sector and is a natural advancement of democracy and capitalism. There are many countries that are passing and implementing crowdfunding rules on their own without any guidance from the USA as in the past. If the Act is not passed soon, then the USA should not expect to become a leader in the global finance.
Within the next 15 to 20 years crowdfunding is expected to be implemented all around the world and funding portals will become the facilitators of money flow replacing investment banks in the global finance sector. The world would certainly not be the same.
References
Cormick, A. (2015). 22 U.S. States Have Adopted An Intrastate Equity Crowdfunding Exemption. Retrieved June 09, 2015, from alixecormick.com: http://www.alixecormick.com/update3-intrastate-equity-crowdfunding-exemptions/
Kaufman. (2014). State Equity Crowdfunding Policies Hold Promise. Retrieved June 09, 2015, from forbes.com: http://www.forbes.com/sites/kauffman/2014/05/28/state-equity-crowdfunding-policies-hold-promise/
Perlmutter, M. (2014). The Future of Intrastate CrowdFunding. Retrieved June 09, 2015, from crowdfundbeat.com: http://crowdfundbeat.com/2014/02/22/the-future-of-intrastate-crowdfunding/
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