On April 5, 2012 the President signed into law the JOBS act, which stands for “Jumpstart Our Business Startups.” I wrote about this act earlier (see The JOBS Act will change fundraising for startups, April 18, 2012). We are gradually learning more about how the act will be implemented.
I recently participated in an on-line seminar produced jointly by SCORE (the Service Corps of Retired Executives) and the National CrowdFunding Association (http://nlcfa.org/). SCORE provides free counseling services to small business people. There is an excellent local chapter in Boise (http://www.idahotvscore.org/). My fellow Business Insider columnist Norm Becker is a SCORE volunteer.
Crowd funding is the act of soliciting funds from groups of people who share a common interest. Crowd funding portals such as Kickstarter (http://www.kickstarter.com/) and Indiegogo (http://www.indiegogo.com/) provide platforms where entrepreneurs can solicit contributions and pre-sales to support their projects. The portals earn commissions on the funds raised.
Today they cannot sell stock, but once the JOBS act is implemented they will be able to do so. The JOBS act directed the US Securities and Exchange Commission to develop rules for selling stock using crowd funding. Current expectations are those rules will be issued in the first half of 2013.
Crowd funding is big and growing rapidly. The amount of money raised in recent years and projected to be raised according the Association is:
Contributions and product pre-sales only
2009 $530 million
2010 $854 million
2011 $1.401 billion
2012 $2.806 billion
Contributions, product pre-sales and stock sales:
2013 $6.058 billion
2014 $16.615 billion
There will be an approval process for portals like Kickstarter and Indiogogo. Once the rules are released and the portals approved, I expect the process to work something like this:
1. The entrepreneur submits his or her business plan and stock offering to the portal. The offering must have a minimum amount to be raised and a deadline.
2. The portal approves or disapproves the offering.
3. Once approved, the offer is posted and the crowd (the many individuals expected to watch the portals) sees the offer and makes individual decisions whether to invest or not.
4. Individuals interested in investing submit funds to the portal.
5. The portal holds the funds in escrow until the minimum is raised.
6. If the minimum is not raised by the deadline, the funds are returned to the investors. If the minimum is raised, the portal transfers the funds, less its commission to the company.
7. The company transfers stock to those who purchased it.
8. Thereafter the company conducts its business and reports to its shareholders.
While the potential to help entrepreneurial businesses is great, it won’t be a panacea and there will be real costs in time and money. Businesses without outside shareholders are often run for the benefit of the manager/owners. With outside shareholders, they will have to be run in a business-like manner without favoritism to the founders and managers.
Raising capital through crowd funding will be a time-consuming process, both before and after selling stock. The business will have to be prepared to assume the record keeping and reporting obligations that come with having many shareholders. And the officers and directors will likely be at risk should the rules not be followed before, during and after the offering
Dr. Kevin Learned is on special assignment with the Division of Research and Economic Development at Boise State. He was the co-founder of Learned-Mahn, Inc., which he believes was the first commercial software company in Idaho. He is past president of the Boise Angel Alliance and an investor in its funds, the Boise Angel Fund and the Treasure Valley Angel Fund. He can be reached at firstname.lastname@example.org, 208-426-3573. This piece was first published in the Idaho Statesman's Business Insider.