December 8, 2011

Changes To Crowdsourcing Financing Rules

crowdsourcing_investmentLast month, while Living The Dream Farm which was featured here was working hard to raise capital on Kickstarter, the US House of Representatives passed a bill that may change how crowdsourcing works. 

Called the Entrepreneur Access To Capital Act, this new bill, if passed by the Senate, would enable companies to offer equity in exchange for investment.   Currently, anyone looking for crowdsourcing funds on sites like Kickstarter and IndieGoGo can only offer trinkets or physical products but not actual equity in the growing company (and investment in the company is technically called a ‘donation’ and not investment).  The reasoning behind that is an SEC law that prohibits entrepreneurs from taking investment from anyone who is not an accredited investor.  However, given how hard it has been lately for entrepreneurs to have access to traditional startup capital given that banks have clamped down on their lending, the House of Representatives decided to try loosen the reigns a little bit and allow small businesses looking for less than $10,000 per investor to now offer equity in exchange for investment.

While some, understandably, worry that this loophole in the law may bring out what one representative called “the wild wild west” of fraudsters, for legitimate small entrepreneurs this is a pretty exiciting change.  This would enable you as the small business owner to offer something that might have more tangible value than, say, a thank you page on your website.  As equity holders your investors could actually see a return-on-their investment.  This may also make it easier for companies to attract larger investors for their projects.  While it’s hard to convince someone to donate $1000 in exchange for a few boxes of your handcrafted goat milk truffles, offering them equity in your company for a $5000 investment might be more appealing to them especially if they feel your business is posed for growth.

The Entrepreneur Access To Capital Act is currently waiting on a Senate vote.

PS – In case you hadn’t heard, Living The Dream Farm did reach their goal of $16,000 so they will recieve all of their funding which will help them grow their farm and their business.  Thank you to everyone who donated a bit and shared the word with friends and family.

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