Crowdfunds and the JOBS Act

Congress appears to be inching closer to passing crowd-funding legislation with the recent JOBS Act that includes a number of ideas for easing the restrictions on raising capital.  What happens to the crowdfunding-specific portion of the bill in the hands of the Senate remains to be seen. Competing bills in the Senate are keenly focused on preventing crowdfunding fraud, and so include criminal background checks on business principals or the requirement that intermediaries be licensed as broker/dealers.

CrowdFunds understands that ever-expanding investor protections are all the rage these days, but legislators should take care to differentiate between (a) sensible anti-fraud safeguards and (b) telling individuals that they cannot be trusted to make sound investment decisions on their own (e.g. setting individual investment limits at $1,000 is equivalent to the government saying you’re a fool soon to be parted from his wallet, so the wallet should be tiny). The key to sensible anti-fraud safeguards is evaluating any new provision in view of this question:  does the proposed safeguard meaningfully improve existing anti-fraud safeguards?  If lawmakers cannot demonstrate a substantive improvement over the financial crime regs already on the books, current law enforcement/SEC capabilities, and established financial industry practices, then it is quite likely to amount to political grandstanding under the best circumstances.  Even worse, excessive worries about ponzi schemes and hucksters merely spawn solutions-in-search-of-a-problem and burdensome, industry-choking regulation.

Conducting criminal background checks on the principals of a business seeking investor capital and requiring basic due diligence to validate that a business is what it claims to be are reasonable anti-fraud safeguards.  Nothing new there. But forcing crowdfunding intermediaries to conform to the broker/dealer regs is unreasonably inconsistent with young businesses seeking (relatively) small sums of capital.

Here’s to hoping Congress gives crowdfunding a reasonable chance of success.

 

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Crowdfunding and Angel Funding

If, or perhaps when, Congress passes one the pending crowdfunding bills, early-stage financing will likely make a rapid leap from the old world to the new. In the old world, both informal networks of angels (e.g. the PayPal Mafia) and formal networks of angels (e.g. Wildcat Angels, a group of Northwestern University alumni) relied on so-called accredited investors to support young businesses. Accredited investors are those who met certain requirements under SEC rules, namely the wealthy folks who can afford to lose gobs of money without the risk of being impoverished.

Attorney William Carlton refers to accredited investors as the 1%, but in the brave new world of crowdfunding, the 99% will suddenly have access to deals previously reserved for the angels. Can angels and crowdfunding sources co-exist?

CrowdFunds sees both funding sources working together.  However, a few obstacles must be cleared.  In particular, crowdfunds should be sourced in such a way as to anticipate the involvement from angels and/or venture capitalists. Otherwise, professional investors might avoid a deal in which potentially unfavorable terms have already been agreed upon–or for a host of other reasons.

Alternatively, a young company might consider crowdfunding as its solitary source of external capital until it reaches profitability or some other benchmark. Under this scenario, the young company might forecast the need for a half million dollars and plan on raising the entire amount without targeting professional investors.

Raising money via crowdfunding might even develop along two parallel paths: mouse-like sums intended to ripen a business for later investors or elephant-like sums  designed to sidestep the need for angels/vc altogether.  In any event, all eyes are now on keenly focused on Congress.

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Crowdfunding Legislation (soon to be un-stuck?)

In February 2012, Handler Thayer, LLP attorney Christine E. McKillip prepared a summary of the various crowdfunding bills under consideration and noted that the legislative process has slowed in the Senate as competing visions and various political interests are hashed out.

This week, Senate Majority Leader Harry Reid announced that the Senate would move forward on bills “to spur small-business growth” by streamlining rules on capital-raising while still protecting investors.  According to Portolio.com, momentum appears to be building in favor of a crowdfunding bill for which President Obama has already expressed support.

As the voting season approaches and Congress battles the perception of deadlock, will a crowdfunding bill finally become law?  CrowdFunds.com is watching!

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