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Crowd Funding An Option For Start-Ups?

Posted by: Admin | Posted on: November 8th, 2011 | 0 Comments

Over the years, I’ve known many entrepreneurs whose good ideas, often small ones, could never get funded. The venture capital system and angel investors are right for some kinds of new businesses, but what about start-up financing for the rest of us?

Crowd Funding may be an answer, at least if the US Senate comes on board. Popular with arts and other projects, where “investors” donate to projects listed on Kickstarter.com and other sites, new legislation would make it easier for businesses to be crowd funded by selling stock to small investors. Think venture capital meets social media.

On November 3rd, the House passed the “Entrepreneur Access to Capital Act” (HR 2930). The bill, authored by Rep. Patrick McHenry, a North Carolina Republican, was a hit with both parties and also received White House backing. It passed by a vote of 407 – 17, proving that, yes, the two parties can actually accomplish something.

A long history of dodgy investment schemes — the bilking of widows and orphans — led to tough 1930s-era laws regulating how businesses offer stock to the public. HR 2930, which still requires Senate action before becoming law, dramatically lessens the requirements.

The bill provides a crowd funding exemption from Securities and Exchange Commission registration of securities offerings, with certain limitations:

  • A $10,000 limit per investor (or 10 percent of annual income, whichever is less).
  • A cap on the amount a company can raise of $1 million per offering (and up to $2 million if audited financial statements are provided).
  • No limit on the number of accredited or unaccredited investors.

Crowd funding is not new, but mostly something we associate with charities and, more recently creative projects. The March of Dimes is a good example of how an early example of crowd funding helped lead to a vaccine for polio. The Washington Monument was constructed using donations from individual Americans.

Social media has moved crowd funding to the Internet, where good ideas have a better chance of meeting people willing to support them. For example, a friend recently raised $10,000 for a children’s software app on Kickstarter and there are many more examples on the site and its competitors.

Lee Barken, a San Diego CPA whose blog provided inspiration for this post, says the time is right for crowd sourcing in equity markets, which he defines as “the process of aggregating small amounts of money from a large number of people in order to accomplish great things.”

Barken continues:

With startup companies struggling to raise funds and the capital markets still reeling from the banking crisis of 2008, the advent of crowd funding may well find a welcome home in business plans throughout the U.S. This new capital formation pathway needs to be balanced with safeguards to prevent fraud and protect the investing public. Thankfully, newer (and crowd-based) tools to monitor online reputations are emerging. Either way, the potential to unleash untold numbers of new ventures is certainly exciting for would-be entrepreneurs.

If you are trying to start the next Google or Facebook, crowd funding is probably not for you. But if your needs are modest — and HR 2930 becomes law — crowd funding may be for you. I’ll probably use it for my next business.

(Here is information on the bill from govtrack.us.)

Article source: http://us.rd.yahoo.com/finance/external/forbes/SIG=13geanv5k/*http%3A//www.forbes.com/sites/davidcoursey/2011/11/08/crowd-funding-an-option-for-start-ups/?partner=yahoofeed

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