Ever since the passage of the federal JOBS Act earlier this year, entrepreneurs and startups everywhere are talking about “crowdfunding.” But what is crowdfunding, and why is everyone so excited about it now?
Basically, crowdfunding describes the collective effort of individual investors who pool their resources, usually via social media and other Internet websites, to support the efforts of others. In the case of an entrepreneur with a startup company, crowfunding allows a startup to leverage social media and other websites to reach thousands of smaller investors and, in that process, increase their odds of raising more startup capital.
Prior to the passage of the JOBS Act, however, crowdfunding was not always a viable way for a startup to raise money. That was because the SEC imposed onerous public reporting obligations once a company reached 500 shareholders. There was also no specific exemption for crowdfunded companies to avoid having to register their new securities offerings with the SEC. But the JOBS Act increased the maximum number of shareholders from 500 to 2,000. Soon, once the SEC issues final rules implementing the new law, a startup can have up to 2,000 shareholders without becoming a public reporting company and being forced to register its securities with the SEC. In addition, because the JOBS Act created a new registration exemption for smaller public offerings made to certain types of individual investors — the so-called “crowdfunding exemption” — soon startups will be able to raise capital by crowdfunding without worrying about complicated and costly SEC registration requirements.
For more information on the JOBS Act and how it impacted crowdfunding, see the SEC’s statement and FAQ’s here. You can read about the SEC’s current progress in drafting implementation rules here.
Taken together, these changes in federal law will soon make crowdfunding a more realistic, attractive option for startups. That’s why websites like CircleUp, Kickstarter, and Fundable are getting so much attention. These websites are basically portals where individual investors can browse different opportunities and, ultimately, make investments in return for an equity or other ownership interest in the venture. Recently, I came across an article that provides an excellent introduction to the issue of crowdfunding and how these portals function. You can read it here.
