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Accessing capital has never been easier; all it takes is the power of the crowd. Over the last few years, crowdfunding grew exponentially to become arguably the most relevant entrepreneurial finance source and a worldwide social phenomenon. Crowdfunding helps people raise capital for everything from social causes to arts projects to business equity financing. With the JOBS Act Part III on the horizon this year with an estimated ruling in October of 2015, the floodgates will have officially broken open. Entrepreneurs can now directly advertise their capital raise to Angels, VC’s and come October, even the “unaccredited” general public. In addition to financing, crowdsourcing offers other benefits, such as public relations and networking, and can even be used to test out consumer demand for new products or services.
It’s now clear that crowdfunding is going to be the cornerstone of small business financing going forward. The investment establishment, Angels, Angel groups, VCs, will have to evolve, or get left behind. According to industry analysts, in a few short years crowdfunding’s volume has grown from $530 million in 2009 to $2.7 billion in 2012. In 2013 we saw that climb 81% $5.1 billion, and last year it is estimated that over $10B was invested through all of the platforms. The number of platforms also grew and diversified, from fewer than 100 in 2007 to well over 1000 platforms today that cater to different funding models, industries and types of projects. For instance, my healthy sports drink company Amara uses CircleUp, among others, which specializes in connecting consumer product companies to seasoned investors by using an equity-based funding model (sometimes called micro-investing). Kickstarter, on the other hand, allows anyone from the general public to support to an array of creative projects in return for a non-financial reward, or simply as a charitable donor. Thousands of entrepreneurs have used Kickstarter for a test launch to capitalize their business with preorders. As one of the more well-known and largest platforms, Kickstarter has reportedly received over $1 billion in pledges from 5.7 million donors to fund 135,000 projects. Other platforms include Fundable, Gust, Angel List, and many, many more.
Since entrepreneurship drives economic development, crowdfunding holds the potential to jumpstart a still sluggish U.S. economy by providing small business owners with needed finances. New data has helped researchers understand how and why small businesses are so vital to a strong U.S. labor market. According to U.S. Census Bureau data for 2011, small businesses (those with less than 500 employees) accounted for 99.7 % of the over 5.68 million total employer films; small businesses with less than 20 workers made up 89.8%. However, according to a 2014 Small Business Association (SBA) report, small business’ access to credit still suffers from the lingering effects of the financial crisis, as well as from tighter lending standards and regulatory restrictions.
So what about Part III? In April 2012, President Obama and other lawmakers recognized the important role crowdfunding could play in supporting small businesses and creating jobs when he signed the JOBS (Jumpstart Our Business Startups) Act. The JOBS Act included a provision that enables equity-based small business owners and entrepreneurs to sell stock to a large number of investors via crowdfunding and social media online platforms. The Act exempts equity-based crowd funders from having to pay federal Securities and Exchange Commission (SEC) registration costs, which research shows most small businesses simply cannot afford. However, as another Entrepreneur.com contributor reported, the SEC has delayed this aspect of the JOBS Act, meaning that it likely won’t go into effect until early 2016. In the meantime, some skeptics debate crowdfunding’s potential, citing “substantial risks” such as “unsophisticated investors, inherently risky businesses,” fraud, and market uncertainty.
One sure thing about Congress’ action to limit government oversight and encourage crowdfunding is that it will help break down entry barriers to entrepreneurs hoping to start and grow their business. In fact, equity-based crowdfunding platforms like CircleUp already take advantage of existing securities exemptions by only allowing accredited investors to support the projects they host. The new Crowdfunding provisions’ enactment would open equity-based funding to the general public, truly taking advantage of the entrepreneurial spirit and desire to connect with a network of supporters that drives many of us to risk starting a new business in the first place.
Some investors out there are looking for a business exactly like yours to invest in, help them find you.