Crowdfunding websites like Kickstarter and Indiegogo have allowed thousands to receive the capital they need to realize their entrepreneurial dreams. However, these sites tend to work out best for people whose ideas play to an Internet audience, such as artists or video game designers. That’s why U.S. lawmakers passed the Jumpstart Our Business Startups (JOBS) Act in 2012. The legislation is meant to make crowdfunding more accessible to small businesses that may not have much of a web presence.
But the Securities & Exchange Commission (SEC) has yet to enact all the crowdfunding clauses laid out in the JOBS Act. Instead, portions of it are being given a test run in states like Georgia, Kansas and Wisconsin as legislators continue to modify the law. For instance, after failing to secure a bank loan, two brothers from Georgia used “equity crowdfunding” to raise $126,000 for their oilcan guitar business. Not only did the brothers spend six weeks explaining their business model to potential investors, but they also had to educate people in depth about the new law. “It’s not just throwing up a profile on a website and investors swarm at you. It’s a lot of effort,” says one of the brothers.
Even with all that effort, though, there’s no guarantee that an equity crowdfunding campaign will work. For Daniel Popovic, another Georgia entrepreneur, three months of searching wasn’t enough time to secure the $400,000 he needed to launch his fitness website. He says that scrounging for capital became a full time job, something that didn’t fit in with his skill set as a web designer. What’s more, even if a company raises enough crowdfunded cash to meet their current goals, there’s a good chance that other investors down the line wouldn’t want to fund a company with 40 or more stockholders. As a result, equity crowdfunding is recommended primarily for small, local shops and restaurants that won’t need venture capital investment going forward. Still, circumstances could change once the revised federal bill finally gets enacted into law. Stay tuned.
Questions:
- Is the SEC dragging its feet in delaying the full implementation of the JOBS Act?
- Will equity crowdfunding be the best funding source for small, local types of businesses?
Source: Ruth Simon and Angus Loten, “Crowdfunding Gets State Level Test Run,” The Wall Street Journal, December 4, 2013. Photo by Steve Crane.