The President’s Pen is a weekly blog written by Jonathan Smith, New Vision’s President and CEO about local economic development projects and initiatives. It also covers economic trends, workforce issues, business climate policies, and manufacturing news.
Nowadays when Congress and the President agree on something it must be significant. The JOBS Act was signed into law in April because both parties agreed that new funding approaches for entrepreneurs were needed. The law authorizes crowdfunding, which refers to funding a company by selling small amounts of equity to many investors. Crowd funding is also being used to support a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, and movie or free software development. Its popularity is growing exponentially as a result of social media and the internet. Now it is easily possible to connect with would be investors, collaborators and business partners around the world.
The JOBS Act permits entrepreneurs to raise up to $1 million through authorized investment portals like Kickstarter. The JOBS act drives these funding portals to provide proper disclosures on investments, to educate and qualify investors, and to reduce fraud. Portals also must enforce offering targets and allow investors to cancel. To ensure these portals remain objective they cannot handle any investor funds or provide any type of advice or solicitation on any active venture.
Crowdfunding is fundamentally changing the way businesses are formed and funded. Investor portals like Kickstarter and Indiegogo vastly extend the friends and family network which is the primary source of capital for most small businesses. A much wider variety of ventures can be funded through these portals. Artists and musicians can now vie for funding on the same footing as serial entrepreneurs. Small amounts of capital can be also be raised via crowdfunding, greatly increasing access to capital options for startups and microenterprises. The options to fund a business (or cause) through crowdfunding are wide open and investment portals are growing rapidly. Kickstarter, for example, helped raise over $27 million for 3910 projects in 2010. Last year the portal brokered 27,086 projects raising over $99 million.
As crowdfunding and investor portals take off there are certainly new options available for local entrepreneurs that need funding to start or grow their businesses. At the same time though, entrepreneurs must still do their homework. In order to put a project on an investment portal the following information is needed as part of any issuer’s disclosure requirements:
Completing a business plan, providing financial information, and identifying key officers and owners is still basic to funding any venture and crowdfunding is no exception.
An entrepreneur needs to consider crowdfunding carefully for several reasons. Total amounts of funds raised are limited so entrepreneurs needing larger amounts (greater than $1 million) need to be especially careful about using crowdfunding to launch their enterprise. Investor portals also put details of a venture out for anyone to see which may be counterproductive for entrepreneurs with trade secrets or sensitive information. And finally, crowdfunding will likely increase recordkeeping and regulations for participating small businesses.
It is difficult to find an angel investor in Yakima County. It is also nearly impossible to get a bank loan as a startup. As a result crowdfunding could offer local entrepreneurs wholly new opportunities to secure funding for interesting projects. While new opportunities abound through crowd funding we think the entrepreneurs who are well organized and focused will still be the ones who get funded at the end of the day.
If you are interested in Crowd funding, check out these links:
Tips for Investors
Crowdfunding website reviews