Regulatory Reform

I Don’t Want a Shirt, I Want a Share: Local Investors and Business Start-Ups Could Benefit From Equity Crowdfunding

Kickstarter, IndieGoGo and GoFundME. Chances are you’ve heard of at least one of these popular websites that allow people to participate in crowdfunding – raising small donations over a large number of people. People have taken advantage of this in a variety of ways by funding media production, art, new tech ideas and even a man who raised $55,000 for his original Kickstarter project to make potato salad.

These websites make it easy for entrepreneurial individuals to market their plans to the world, and these individuals are finding that the world is willing to give for good ideas. The crowdfunding industry raised $2.7 billion in 2012 and Kickstarter claims that about 43 percent of all their fundraising projects meet their fundraising goal. Typically, these campaigns offer various perks in return for investments, such as preorders for albums of music artists, t-shirts or access to special events.

These perks may have been appealing to those who wanted to help a campaign achieve its goal and take part in its success, until a virtual reality gaming company, “Oculus Rift,” sold out to Facebook for $2 billion after reaching and surpassing the $2 million fundraising goal from its Kickstarter campaign. Had those who helped crowdfund Oculus been able to buy equity, instead of t-shirts and posters, they would have had a return of investment of nearly one thousand percent, leaving investors unhappy with their perks.

Clearly, equity crowdfunding has benefits to offer both investors and entrepreneurs, so why doesn’t it happen?

Up until 2012, the only people who could buy securities were those that had the bountiful resources it takes to become accredited. However, the 2012 JOBS Act allowed businesses to solicit openly for investments for up to $2 million per year, with limits on how much non-accredited individuals could invest. The JOBS Act required the Securities and Exchange Council (SEC) to write new regulations ninety days after the law was enacted, however the SEC has dragged its feet in doing so, and has yet to finalize them, despite having proposed rules published for over a year. This has created too much uncertainty for the crowdfunding market to thrive. With more and more businesses looking to use this effective fundraising and marketing technique to allow for investment opportunity, some states aren’t waiting around for the SEC to finish their work.

To date, 13 legislatures have taken advantage of an exemption to begin crowdfunding investment in their own states, Texas doing so on October 23rd. Georgia led the charge in being the first state to enact its own intrastate crowdfunding policy. While the rollout in crowdfunding platforms has been somewhat slow so far, there is optimism in these states that as businesses and investors become more educated and accepting of the new processes and platform technology, opportunity for raising and investing capital will increase and be a viable option for more small businesses and startups. Even after the federal regulations are finalized, they are expected to be more limiting and burdensome than state regulations, meaning businesses and investors may still be inclined to search locally first for investment and fundraising opportunity.

The popularity of donation-type crowdfunding platforms such as Kickstarter have proved their marketing and fundraising merit, and the controversy over Oculus Rift has shown a desire for equity investment opportunity for non-accredited individuals. The JOBS Act of 2012 allows people more freedom with their money, allowing them to invest and seek investments in ways never allowed before, but with no end in sight to the bureaucratic politics at the federal level, state legislation could help bring more clarity and confidence in the crowdfunding market for both investors and businesses alike.

In Depth: Regulatory Reform

In his first inaugural address, Thomas Jefferson said that “the sum of good government” was one “which shall restrain men from injuring one another” and “shall leave them otherwise free to regulate their own pursuits of industry.” Sadly, governments – both federal and state – have ignored this axiom and…

+ Regulatory Reform In Depth