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President Obama signed the Jumpstart Our Business Startups Act -- and the provisions within it to legalize crowdfunding for equity in the United States -- at around 2:40 PM EDT on April 5, 2012

What is Crowdfunding?The basic idea is to raise money through relatively small contributions from a large number of people - combining the best of microfinance and crowdsourcing.

Why is it necessary?

• Entrepreneurs, startups, and small businesses are overlooked by conventional lenders (local banks or venture capitalists, angel investors) and have a hard time accessing credit in today's marketplace.  As a result, United States capital formation and entrepreneurs suffer.
• Today in the United States, internet-based crowdfunding is utilized to raise millions of dollars for charitable organizations and non-profits.
• Other nations - such as Great Britain, Hong Kong, and the Netherlands - already offer equity-based crowdfunding opportunities to investors and startups to spur capital formation.
• Entrepreneurs and investors in the United States that communicate through internet-based platforms and offer securities are subject to costly SEC registration requirements.
• Compliance with each individual state's securities laws and rules - known as "Blue Sky Laws" - is prohibitively costly if companies are seeking to raise only small amounts of money.
• The SEC's general solicitation ban restricts companies from using modern communications to inform and connect to investors.

The Entrepreneur Access to Capital Act (H.R. 2930):

• Creates a crowdfunding exemption from SEC regulations for firms raising $1 million or $2 million if the issuer provides potential investors with audited financial statements.
• Individual investments limited to $10,000 or 10 percent of an investor's annual income, whichever is lesser.
• Preempt Blue Sky Laws and eliminate the application of the ban on general solicitation for issuers relying on the crowdfunding exemption.
• Excludes crowdfunding investors from counting as shareholders for the purposes of calculating the 499-shareholder cap under 12(g) of the Securities Exchange Act.

What They're Saying:

• "Pennies From Many" (op-ed) - The New York Times, September 25, 2011
• "House Panel Approves Startup Bills, Paving Way for Floor Votes" - The Wall Street Journal, October 26, 2011
• "Is crowdfunding startups a solution, or just another problem?" - GigaOM, November 1, 2011
• "Three Cheers for Cong. Patrick McHenry (R-NC)" - The Yorktown Patriot, November 2, 2011
• "JOBS Act will boost small business" - The Examiner, February, 23, 2012

Crowdfunding Revolution: Should I Do This?

 

Posted by Don Lehman |  6 Feb 2012  |  Comments (5)

By Hannes Grobe (Own work) via Wikimedia Commons

Is crowdfunding right for your project?

From my introductory essay, you can already get the sense that I'm pro-crowdfunding. But let's be honest with ourselves, in an ideal world where everyone has access to easy, no-strings attached money, no one would look for outside funding. Just like seeking out loans or investors, there are pros and cons to crowdfunding your project. Here are the two big questions you should ask yourself prior to committing.

1) Do I have the time to make this commitment?

If you are funded, do you have the flexibility in your schedule, or at the very least, the willingness to forgo sleep for the several months it will take to get your project done in a timely matter? Once you get funded, you are on the hook to produce. Your Backers aren't just backing your idea, they're backing you—financially and emotionally. There really is a bond that Backers feel towards the projects they support and they want nothing but success for you and your idea. Real delays and setbacks can be tolerated, but you harm that trust by stopping because you get too busy or lose interest. Moreover, you risk not only damaging your reputation, but you give your Backers a reason to think twice before supporting other crowdfunding projects.

I suppose the real question to ask yourself is, "Do I believe in this idea so strongy that I am compelled to see it through, no matter what?" If the answer is yes, then...

2) Do I want to develop this publicly?

Developing something out in the open for people who have already pre-ordered your idea is THE major difference between a traditional product development process and one done through Crowdfunding. It's not for everyone or every project.

Let's start by thinking about the process of how things get made. Take this fairly typical, over-simplified development process timeline. Many design consultancies have some of variation of this on their websites, minus the dollar signs.

A chart like this looks fairly innocuous until you start thinking of the pain points in the process. I have highlighted those in red. For designers, the easy stuff is in the blue region. You have an idea, then you do some sketches and a 3D rendering. But any fool can have an idea and 3D rendering. At some point you pass the rubicon of moving from a concept to proving that your concept works. It's that process of turning nothing into something that's the real trick. If we're truly honest with ourselves...

...the timeline looks more like this. More heavily weighted on making the idea become a real thing than it is coming up with the idea and design. This is why it's so hard to manufacture stuff for lone designers and new companies. It takes lots of money, lots of time and it has lots of potential for costly mistakes.

In a conventional product development timeline, you don't sell the product until almost the end of the process. All of the fear, self-doubt and shouting at the moon in frustration has been mostly worked out and it just sort of magically appears on the marketplace. You have the luxury of being able to fail and iterate in private while maintaining the element of surprise with your competitors. Traditionally, the risk is after investing all this time and money, you don't really know for sure if people will buy it or not. How many products have you seen or worked on where the people involved in its creation were certain of its success, only to see it fall flat?

Now compare this with a Crowdfunding timeline:

This is where it gets interesting. Any point between having a "Proof of Concept" prototype and needing to start manufacturing can be a viable time to look into crowdfunding. Of course what this means is you are selling an unfinished idea (a risk to be sure) and potential competitors get to know your plans before you are ready to fully act on them.

You may lose the element of surprise and the luxury of being able to make mistakes in private, but what you gain is access to capital and confirmation that your idea may have legs in the market. I actually think that this part of crowdfunding, the "Let's see if it sells, before we make it" part is going to become attractive to not only small independent designers, but even small to midsize companies who need confirmation before they bet the farm on a new product.

The public aspect of crowdfunding development means that you need to keep your Backers in the loop of your progress. This can be alternately amazing and incredibly stressful. You're not only dealing with the ups and downs of getting something made, but you have a large group of people invested in your success, watching and critiquing your progress in real time. Basically it turns the design process into real time performance art. Most will be fully supportive of you, but an extreme minority will be highly critical of every misstep (SPOILER ALERT: You will have missteps.) in a very public way. To put it more succinctly, its the absolute best parts of the Internet, mixed with a dash of the absolute worst parts of the Internet.

Here is a good test for yourself to see if you can deal with this: Start out by reading the comments to posts on swiss-miss.com. Most everyone is super excited and just happy to be there. That will be like what 95% of the feedback you get will be like. Nice! Now go read the comments on any tech blog and imagine instead of flaming Apple or Android, they are talking about you and your idea. If you can stomach reading more than 10 minutes and not question humanity: Congratulations! You are an ideal candidate for crowdfunding!

To be a little more serious, I loved sharing my process and keeping my Backers in the loop of progress being made. In fact, this was one of my favorite parts of my project. Posting a video of a CNC lathe machining my product and seeing the lightbulbs go off for people who had never been exposed to manufacturing before was so freaking cool. There were the occasional nights when it was better to just shut off my laptop and go to bed than to confront the crazies, but overall it was a very positive experience. This open nature of the crowdfunding process is so unique, that I will devote an entire article on how I think you can do this effectively.

Lenny and Edwin of Teale setting up the Stylus Cap production.

At this point I should mention, it's incredibly important to have at least some past experience in bringing a design all the way through to market before starting a crowdfunded project. If you don't have that background, then at least make sure one of your partners or an outside advisor is available to provide expertise. The idea of "easy" money to fund something is really alluring to anyone with a brilliant concept, but when the going gets tough, you have to know how to navigate through development issues and be able to speak to your Backers with clarity and authority on where you are in the process.

The bottom line is this: The premise of crowdfunding projects implies that you feel very certain you can get your idea produced, as long as you can secure money from Backers. If you are confident in your experience and ability to manufacture something, plus are willing to be open about your progress with your Backers, while having a thick skin when things get bumpy, then you should consider crowdfunding.

What sites should I look at for crowdfunding my product design project?

Notice that I threw in the words "product design project." While there are many sites that are devoted to crowdfunding, and a couple that are interesting from a designer's perspective, the only one I would pursue in February 2012 for product design is Kickstarter. It has the traffic, the reputation and the track record of success that none of the other sites can come close to. I will go over a couple sites that will be interesting to designers, but then go into further detail about Kickstarter.

IndieGoGo

Where as Kickstarter only allows "creative projects" that it prescreens, IndieGoGo allows pretty much anything. Have a foundation or cause you want to start? Go to IndieGoGo. Want to get money to start your company? Go to IndieGoGo. Want money to get in vitro fertilization treatment? No seriously, go to IndieGoGo. Pretty much anything goes on IndieGoGo and that's part of the problem for designers: It's hard for someone to weed through everything to find your project. For some types of projects it's absolutely great, but for product design, it's difficult to get the same visibility (i.e. funding) you have on Kickstarter.

There are some interesting things about IndieGoGo. For one, you don't need to hit a funding minimum to get money. So if your goal is $15,000, but you only get $10,000, you still get the $10,000. On Kickstarter, you either reach your goal and get funded or you miss it and get nothing.

The other difference is IndieGoGo accepts all projects, where as Kickstarter screens and selects projects that will be allows to launch. If you get rejected by Kickstarter or are worried that you won't make your funding goal, IndieGoGo, could be the right place for your project.

A few additional facts: right now Kickstarter only supports campaigns that are based in the United States, whereas IndieGoGo allows over 200 countries to participate. Kickstarter also limits the amount of days your project can seek funding to 60, while IndieGoGo allows for 120 days. Kickstarter charges a higher percentage fee (5%) than IndieGoGo does (4%), and the 3rd party fees (charged by credit card processors) are also higher on Kickstarter (3-5%) than on IndieGoGo (2.9%).

In many ways IndieGoGo is to Kickstarter, what Android is to iOS. One has more options, one is more focused. Since I am more of the iOS mindset, my preference is for Kickstarter, however I could see why many others would be more interested in IndieGoGo.

Quirky

Quirky isn't really a crowdfunding site, but if you have an idea, but not the know-how to get it made, it could be for you.

It works like this: for $10 you can submit an idea that gets reviewed and "influenced" by the community. People can comment on it and make suggestions on how to improve it. If it gets selected by both the Quirky community and internal team to be produced, you can earn 12 cents of every dollar the product makes from sales on quirky.com and 4 cents of every dollar at retail. Not a bad deal when you consider that Quirky is shouldering all of the development cost and risk.

Kickstarter

This is where the action is for product designers. 2011 was a MAJOR year for design on Kickstarter. To give you a small sense of the crazy velocity Kickstarter is on, when my Stylus Cap project closed in March 2011, it finished #14 all time for funding dollars compared to every project up to that point. Now? It's #37 in just the Design category. All time, it probably doesn't even crack the top 200.

In 2010, there were only 235 projects launched under the Design category on Kickstarter. In 2011, there were 1,060 launched. Of those 1,060 projects, 319 were successfully funded, making a cumulative $9.1 million dollars.

To put that $9.1 million into context, in April 2011, Kickstarter celebrated it's second birthday. At that time, they reported that in 2 years, the design category had raised $3.6 million. (Of that $3.6 million, nearly a million of that was Scott Wilson's LunaTik iPod Nano Watch Kit in 2010, still the most funded project in crowdfunding history.) From $3.6 million in two years to $9.1 million in just one is pretty nutty. Let's compare Design, the #3 overall category on Kickstarter to the Film (#1) and Music (#2) categories.

Film and Music dwarf Design, but Design had a major jump in 2011. At the rate its growing, I would expect it to be much closer to Music's overall funding total in 2012.

What's really interesting is I think the total for Design could be a lot higher, depending on how you classify certain projects. There is another category on Kickstarter called Technology. Some of those projects are pretty geeky and meant for people to hack around with, but some of the projects seem indistinguishable to me from what I would call a Product Design project.

Back to Film and Music, I think a big reason why those categories have been so successful on Kickstarter early on, and will continue to be, is that if you are a filmmaker or a musician, you're much more predisposed to being scrappy when it comes to tracking down money to fund your projects. Designers tend to do more work for others than for ourselves, so we haven't had as much experience hustling for our pet projects, which makes this a new phenomenon for us and yet another reason why its so exciting.

Now as far as the reasons to why Kickstarter is such a success, there are a few small things that it does really well:

1) Kickstarter filters what projects get posted.

This is important because it keeps Kickstarter projects feeling like they are part of a conscious effort to curate the site and keep it interesting.

The first filter is that all Kickstarter projects need to be "creative" in nature. So: no causes, no humanitarian aid, no business startup cash, etc. Projects must produce something that can be shared in some way with the world and Backers: albums, films, artwork, plays, technology, games, products, etc.

The second filter is more subjective which means its a little harder to know exactly what it is, but I will do my best to try and guess: Projects get further reviewed by Kickstarter to see if they are worthy of being on Kickstarter. Meaning: Does the project creator seem to know what they are doing? Does the project fit the vibe of Kickstarter? It may not seem fair if you get rejected, but Kickstarter gives you reasons why you were rejected and encourages you to improve your proposal and resubmit. This is a good thing.

2) You only get funded if you meet a money threshold you set prior to launching your project.

For example: If you set your funding goal at $10,000, and you get $9,999 and below, you get nothing. The main reason for this is to prevent someone who wanted to raise $10k, but only got $5k, from doing a $10 project on a $5k budget. It also has the side effect of getting Backers invested in spreading the word out to their friends about the project to make sure they get their rewards.

However, you get to keep anything over your goal as well. So if you make $15,000, you get to keep that extra $5,000. Nice.

3) It's really easy to find and back projects.

Kickstarter has really perfected the experience of contributing money to projects. The layout is clean. Every project's main elements (the video, the pledge button, updates, comments) are in the same easy to find places. Moreover, it's friendly and non-threatening.

4) It's success has made it more successful.

Much in the same way Facebook hit a tipping point for becoming the de facto social network, Kickstarter is starting to hit that tipping point as well. As more projects get funded and are successful, even more projects get funded and successful.

5) It's not about the money.

I know I listed out all those fancy charts and numbers above and its true they all came directly from Kickstarter's site. They are consciously building a business and from everything I have gathered, its seems that they are turning a respectable profit (5% of every successful project goes to Kickstarter).

However, I don't get the sense from Kickstarter that money is what motivates them. If it was, they would have invited much larger companies to post projects long ago and been much more active in promoting projects that have the potential to make a lot of money. They seem genuinely interested in having every project succeed, big and small, because the journey is what matters to them. That ethos goes a long way towards giving them the trust that is necessary for both Creator and Backer involvement. There is a lot of Internet goodwill and trust built up for Kickstarter and that's a major reason why it's the only solid first choice to start with when you look into crowdfunding.

Next time: Preparing for Launch.

About Don Lehman

Don Lehman is an designer based in Chicago. In 2011, he founded More/Real and developed it's first product, Stylus Caps, which turn pens and markers into touchscreen styluses that work with the iPad. Stylus Caps launched on Kickstarter, reached 488% of its funding goal in just 30 days, and are now in production. Don has a BFA in Industrial Design from the Rochester Institute of Technology.

Crowdfunding - Micro No More!

Jan 22nd 2012, 13:42 by G.F. | SEATTLE

THE idea of collecting cash online through a mix of patronage and prepayment sprouted informally a few years ago. Initially bands used it to raise money for studio rental and the production costs for releasing an album. But the idea took off and is now offered by a plethora of middlemen, and embraced by all manner of creative types. In 2011 Kickstarter, the most successful of the online enablers, received nearly $100m in pledges for over 27,000 projects launched at its site.

This newspaper has written about Kickstarter several times in the past two years, including an overview of how crowdfunding works after the firm had raised about $15m in its first year. At the time, it was unclear whether such crowdfunding (also called micropatronage) was a passing fad or a rising alternative to conventional starter financing for creative media.

Kickstarter's performance in 2011 bolsters the latter case. The $99.3m pledge figure represents all commitments, backed by valid credit cards, to over 27,000 projects launched last year. The two biggest categories were film (with $32.5m pledged) and music (with $19.8m). Only those projects which reach a pledge target they set themselves within either 30 or 60 days receive the cash, which is charged to donors' credit cards. (These are validated on making the pledge, so Kickstarter's collection rate in close to 100%.) Last year 46% of the projects managed the feat; those that fall short do not get the cash and their donors are not charged.

In 2011 nearly 12,000 projects were financed through contributions by 960,000 unique donors with a median pledge of $25. Kickstarter's Medici, with the handle "H.T.", supported 724 projects. Yancey Strickler, one of Kickstarter's founders, says that just over $83m was collected. Projects which do reach their goal typically surpass it, typically hitting 130% of the target amount, and raising on average $4,500. However, ambitious ideas routinely muster $100,000 or more, and record holders have come within a whisker of $1m. (The company features a page listing its biggest success stories.) Unsuccessful campaigns rarely pass 20% of the goal. 

The remaining $16m in pledges was spread thinly among 34% of projects that win some support, an average of $1,000 each, but fail to reach their targets. One-fifth of launched projects do not receive a single pledge, a fact that Mr Strickler ascribes to project organisers who do not understand, despite his firm's best efforts, that they must actively market their effort to friends, family, fans and strangers. 

Kickstarter sends out a regular newsletter with editors' picks for the most interesting ventures. The site is curated to allow visitors (30.6m in 2011) to discover items of interest. But Mr Strickler says that the firm strives to remain behind the scenes and stays out of the relationship between organisers and funders. That can lead to disappointments, as Kickstarter disburses money for successful projects with no obligation on the part of the recipient to follow up. Kickstarter makes each project's creator responsible for delivery, and currently does not hold responsibility for late delivery or recipients who abscond.

Matt Haughey, a founder of MetaFilter, posted an account of an iPhone-case project he backed in which the delivered product did not live up to expectations. The comments on Mr Haughey's post feature a few prominent funded but unfulfilled efforts (as well as a spirited response from the iPhone-case makers). Projects that seem implausible or overambitious tend not to secure enough pledges to go ahead. Occasionally, those that do meet the bar fall through. For example, the developers of a wireless power-outlet control cancelled a Kickstarter effort despite surpassing their funding goal, after comments on the project raised doubts about its technical feasibility.

But Kickstarter seems to have vanishingly few of these. And proposals keep flooding in at a rate of 2,500-3000 a week. Micropatronage is growing bigger by the day.

What You Need to Know About the New Crowd-Funding Bill

By Jeff Steele at TheWrap The U.S. House overwhelmingly passed its first significant crowd-funding legislation, in the form of H.R. 2930, the Entrepreneur Access to Capital Act.   The bill (now in the Senate) amends the Securities Act of 1933, by allowing entrepreneurs to crowd source (online) up to $2 million per year in investment capital directly from individuals without having to register the investors with the SEC. However, the commencement and completion of the raise do need to be filed with the SEC.   Entrepreneurs (the “issuers”) must provide potential investors with audited financial statements in order to qualify for the $2 million cap, otherwise you are capped at $1 million.   Individual investments from crowd-shareholders are capped at $10,000 (or 10 percent of their annual income), whichever is less. To be clear, this is not free money; these are bona fide investor-securities for which they will receive a return on their investment as well as ownership interest in your enterprise, be it film, music, games, art, books, inventions, startups, etc. Many filmmakers have raised funding for films on popular gifting sites like Kickstarter and IndyGoGo. These sites have found success raising free money for ultra low budget films and other projects through crowdfunding models where people can pledge as little as $1 and as much as they like to a variety of different projects. That is free gift-money that cannot be paid back, so project benefactors have no financial interest in your film, nor can they take a charitable deduction on their gift (though some sites have contrived charitable workarounds.) H.R. 2930 specifically amends the “Requirements with Respect to Certain Small Transactions” (Section 4A of the Securities Act), by providing for registration exemptions for certain crowdfunded securities -- the details of which are summarized at the end of this article. Some important points worth highlighting are: The $1m/$2m funding caps and the $10,000 investment cap are pegged to the Consumer Price Index for all Urban Consumers, so they can be adjusted over time (this prevents the caps from becoming outdated.) A requirement that the issuer or broker use a 3rd party for cash management (this keeps prying fingers out of the cookie jar.) A requirement that the issuer or broker raise at least 60% of the target offering to take possession of the funds (this is a good because it keeps the issuer from collecting money for a project they can’t afford to finish.) Raising crowdfunds does not preclude issuer from raising capital by other means (this allows crowdsourced equity to participate in traditional capital structures alongside (other equity investors, tax credits, collateralized and mezzanine loans, etc.) Background checks are required for issuers and brokers/intermediaries. Crowdfunded shares cannot be resold for 1 year, unless the shareholder is an accredited investor or the issuer. The act does not specify which enterprises can be crowdfunded and which enterprises will be banned, if any.  So that remains to be seen. The act does preempt state “blue-sky” laws, but still allows for state enforcement. Massachusetts has the most representatives that voted against it (5 out of 10). Curious. The initial funding cap was $5 million, but was quickly lowered to $2m/$1m. The Act spells crowdfunding as one word, which will hopefully alleviate the 1 word vs. 2 words vs. hyphenated discrepancies. The bill has met some backlash by politicians claiming that crowdfunding measures would lead to speculative, risky offerings that could translate into heavy losses for small investors.  This argument has merit and should be carefully considered by the Senate and SEC.  It’s ironic that given the potential fraud risk and rampant financial abuses of the past 10 years that the House Republicans voted (in a strict partly-line vote) to kill an amendment that would have required intermediaries to disclose to potential investors how they are compensated.  This issue has plagued charities that outsource fundraising to 3rd party companies that, in turn, take a hefty percentage of the donations they raise.  Perhaps the Senate will re-introduce it. During the Senate Banking Committee’s December 1st hearing on spurring job creation through access to capital, Senate Banking Committee Chairman Tim Johnson said in his opening statement that they will hear from witnesses who will “provide insight on proposals to expand the scope of Regulation A offerings, to permit general solicitation of investors in Regulation D offerings, and to allow individuals to solicit and sell small amounts of stock over the Internet through crowd-funding.” Johnson continued, “They will address the size of a private offering and the amount of money that a crowdfunder should be able to risk without full regulatory protection.  They will discuss the types of markets where these securities should trade. They will also describe the existing investors’ safeguards, such as disclosures about the business and financials, and how current proposals would affect those safeguards.” Summary of H.R. 2930 (PDF): The amendments to Section 4A are as follows: ‘‘(6) transactions involving the offer or sale of securities by an issuer, provided that— ‘‘(A) the aggregate amount sold within the previous 12-month period in reliance upon this exemption is— ‘‘(i) $1,000,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, or less; or ‘‘(ii) if the issuer provides potential investors with audited financial statements, $2,000,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, or less; ‘‘(B) the aggregate amount sold to any investor in reliance on this exemption within the previous 12-month period does not exceed the lesser of ... ‘‘(i) $10,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics; and ... ‘‘(ii) 10 percent of such investor’s annual income; ‘‘(C) in the case of a transaction involving an intermediary between the issuer and the investor, such intermediary complies with the requirements under section 4A(a); and ... ‘‘(D) in the case of a transaction not involving an intermediary between the issuer and the investor, the issuer complies with the requirements under section 4A(b).’’ H.R. 2930 goes on to describe the statutory Requirements to Qualify for Crowdfunding Exemption, for issuers and brokers, which includes cautionary language, background checks, website requirements, etc. http://mobile.reuters.com/article/idUS125555802420111212?irpc=932

99designs Raises $35 Million for Crowdsourced Graphic Design

Authored by Mark Hefflinger on April 29, 2011 - 6:27am.

San Francisco - 99designs, the developer of an online marketplace for crowdsourced graphic design, said on Thursday it has raised $35 million in its first round of funding, led by Accel Partners.

Angel investors Michael Dearing (eBay, Harrison Metal), Dave Goldberg (Survey Monkey), Stewart Butterfield (Flickr, Tiny Speck) and Anthony Casalena (Squarespace) also participated.

San Francisco-based 99designs was founded in Australia in 2008, when co-founders Mark Harbottle and Matt Mickiewicz -- the entrepreneurs behind sitepoint.com, Flippa.com and Learnable.com -- spun it out of the SitePointForums.

The company, which has 26 employees, said it will use the capital for international expansion, platform development, community initiatives like design scholarships and aggressive hiring in both San Francisco and Melbourne.

"Most importantly, this investment goes a long way towards guaranteeing that we will be around long term," wrote Harbottle in the company's blog.

99designs said it currently has over 100,000 designers in 192 countries, and has paid out over $19 million to designers to date.
To Learn More Click Here

Small Business Financing Might Get Easier If SEC Eases Crowdfunding Regulations

Venture & Angel Capital April 27, 2011 By Rieva Lesonsky

Social media has made it cheaper and easier for small business owners to market their companies. Now, social media companies might be making it easier for small businesses to raise capital, too.

Back in January, I posted on Small Business Trends about the rise of crowdfunding as a possible solution for small business owners seeking financing. Closely related to peer-to-peer lending sites, such as Prosper.com, crowdfunding goes one step further. While peer-to-peer lending focuses on individual transactions, crowdfunding uses the Internet to encourage many individual investors to contribute small amounts, adding up to substantial capital.

Today, individual investors are clamoring for a piece of hot social media companies like Facebook and Twitter, but those companies don’t want to go through the complex legal disclosures current securities laws require. As a result of this demand, reports VentureBeat, the Securities and Exchange Commission (SEC) has decided to study the crowdfunding issue. “[The] staff is taking a fresh look at our rules to develop ideas for the Commission about ways to reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection,” says SEC Chairman Mary Schapiro.

Easing restrictions on crowdfunding would let Facebook and Twitter raise money from thousands of investors –and could also benefit small business owners looking to bootstrap their businesses without having to give up control to venture capitalists. For example, if you wanted to raise $100,000, you could sell $100 shares to 1,000 individual investors via Facebook.

Of course, although these individual investors are investing only small amounts of money, there’s still a risk involved–and that’s what the SEC is concerned about. Back in 1992, the SEC allowed small companies to issue shares of up to $1 million to ordinary investors without any going through the usual regulatory hoops, such as full disclosure of the company’s financial information. In 1999, however, that regulation was changed because of concerns about fraud.

A petition that would allow crowdfunding of up to $100,000 has been backed by 150 organizations and individuals. What do you think about the SEC’s move?

To Learn More click Here