Thanks to crowdfunding, it has never been easier to enter the music or film industry. For as little as $1, you can be a part of The Lonely H’s fourth album or help fund a documentary film about extreme wrestling. In 2011, $1.5 billion was raised via crowdfunding for over 1 million projects.
The trend shows no signs of slowing.
In April of this year, President Obama signed the JOBS (Jumpstart Our Business Startups) Act into law. The purpose of the legislation is to help support startups by reducing regulatory burdens and easing their access to capital. Many of the provisions of the JOBS Act are now in the hands of the SEC who have the difficult task of achieving these goals while continuing to protect investors. The SEC’s plan should be revealed within 6 months, and it could change the game that, up until now, only accredited and institutional investors were allowed to play.
Today, the main platforms that support crowdfunding (Kickstarter, RocketHub, StartSomeGood) feature creative and humanitarian projects. Instead of equity or dividends, “investors” receive rewards depending on the level of their donation (a hand-written thank you note from the band, screen credits as an executive producer, etc.). Existing securities law make it illegal for businesses to offer financial rewards, but thanks to the JOBS Act, that is about to change.
Although many are excited about the positive impact crowdfunding might have on job creation and innovation; it is not without its detractors. Kickstarter claims on its website that 44% of projects are successfully funded, but that number drops to 7% if the “ask” is over $100,000.
However, the bigger question-the one the SEC is trying to find an answer to-is how to protect investors from fraud. Last week Kickstarter posted a blog outlining what their responsibility is to backers of projects. Not much, apparently:
“The pursuit of these projects with a guarantee doesn’t work. A Kickstarter where every project was guaranteed would be the same safe bets and retreads we see everywhere else [where exactly are these places?]. The fact that Kickstarter allows creators to take risks and attempt to create something ambitious is a feature, not a bug.”
Whether you love or hate it, almost everyone in the startup scene agrees crowdfunding will be a game changer. The ball is in the SEC’s court now.