Call it venture capitalism for the masses. The U.S.
Jumpstart Our Business Startups, or JOBS, Act is about to
inject new energy into crowdfunding, a web-based approach to
raising business capital. Through an amendment to the
Securities Act, the JOBS Act lets start-ups raise money from
the public via crowdfunding platforms like Fundable and
RocketHub, as long as those platforms register with the U.S.
Securities and Exchange Commission.
Once regulations are in place, this year or next, that
change will provide an entirely new class of capital and
open up trillions of dollars of new funding to small businesses
in the U.S., says Eric Corl, president and co-founder of
Columbus, Ohiobased Fundable.
The current crowdfunding model offers only trinkets as
payback. For example, a $10 pledge to beverage maker Homemade
Bliss on Fundable.com entitles the donor to a discount on a
six-pack. Under the new model, Fundable and other portals will
give nonaccredited investors the chance to buy equity after
scrutinizing a start-ups business and financials. But
those small-time venture capitalists shouldnt expect to
get rich or even turn a profit. The odds are not
good, warns Lewis Gersh, managing partner at Metamorphic
Ventures, a New Yorkbased venture capital firm whose
portfolio includes crowdfunding giant Indiegogo. People
who dont do this regularly have to go into it thinking,
Im going to lose it all.
Anyone hoping for outsize returns needs to understand that
the crowdfunding change is a big social and business
experiment, Gersh says. It raises many practical and regulatory
questions. Among the latter: how to establish good investor
relations practices that dont flood a start-up with
paperwork. The more investors, the more complicated things get,
Gersh notes: Its a nightmare for a public company;
how are small start-ups going to manage it?
This and other regulatory concerns could be resolved by
December 31, the SECs deadline to make its new
crowdfunding rules public under the JOBS Act. But Gersh thinks
mid- to late 2013 is a more likely time frame. Its
as if were starting a whole new investment, regulatory
and legal regime, including a market to house it, he
explains. Were starting from scratch, and
theres a lot to it.