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Crowdfunding Investing

Written By Briton Ryle

Posted March 6, 2013

Wouldn’t you like to have been Brian Epstein, discovering the Beatles?  Or one of the original investors who backed George Lucas’ first Star Wars movie?  That would be quite the return on your investment, wouldn’t you say?

Well soon you could be one of the early discoverers of the next music superstar, or an early financier behind the next movie blockbuster, or a part-owner of the next social media craze… and share in their enormous profits.

Artists and entrepreneurs around the world—in all disciplines from music to film to art to video game design to publishing to technology—are bursting with talent that will sadly go to waste if they rely on traditional funding.

Recording companies, movie studios, banks, venture capital firms, and angel investors simply do not have enough money to back all the pitches they receive.  They have to be selective, picking only the cream of the crop.

Yet those who are escorted back out still have talent and ideas worthy of development.  Well, now there has arisen a new form of fundraising that is reaching out to struggling startups looking for their big break.  And just about anyone can become a backer for almost any amount they choose to invest.

The concept is called ‘crowdfunding’, and it is rapidly gaining attention as a legitimate liaise between startups and financial backers.

As succinctly defines it, “Crowdfunding … is a funding method where common people … the crowd … fund your personal or business project with their own money.”

This is more than your simple donation petition.  “The main difference between crowdfunding and donation,” the site explains, “is that crowdfunding is tied to the American JOBS act that allows online sales of small stock to a huge pool of investors, although the act has not been passed yet.”

“The Jumpstart Our Business Startups Act, passed [by Congress] almost a year ago,” elaborates the San Francisco Chronicle, “will let privately held companies sell up to $1 million a year in unregistered stock to mom-and-pop investors using the Internet and social media. But they can’t start until the SEC completes the regulations.”

Selling stock or part-ownership in a project or business is essential to attracting financing.  Under current regulations, the only ways to do this are to either go public and issue shares on an exchange—which is hugely prohibitive financially—or to sell shares to accredited, high-net worth individuals.  A private company or individual is not permitted to sell shares to the general public at large… currently, that is.

Well this is what the SEC is looking into: new regulations to permit an individual or private company to sell stock publicly to anyone.

But the SEC needs to find a comfortable degree of regulation here.  Under-regulation could send out an open invitation to misrepresentation and outright fraud, while over-regulation will close the door on far too many business hopefuls, defeating the entire purpose for which crowdfunding has arisen in the first place.

The San Francisco Chronicle chronicles some key points under consideration…

• “The crowdfunding provision creates an exemption that will let companies sell up to $1 million in unregistered stock every 12 months to an unlimited number of investors who need not be accredited.

• “The transaction must go through an intermediary, either a broker or a funding portal. The intermediary must register with the SEC and a self-regulatory organization, make sure investors understand the risks and conduct a background check on the company’s officers, directors and large shareholders. They are also supposed to make sure investors don’t exceed their investing limit.

• “The most one person can invest in all crowdfunded securities combined in one year is:

– The greater of $2,000 or 5 percent of annual income or net worth (excluding a home) if the person’s annual gross income or net worth is less than $100,000, or

– 10 percent of annual income or net worth, up to $100,000, if the person’s income or net worth is at least $100,000.”

Although crowdfunding is not permitted just yet, there are already many crowdfunding portals actively accepting registration as a fundee looking for financing or as a funder offering financing.

As one such portal—iCrowd—puts it:

“… you will not be able to invest until then.  [But] that doesn’t mean that iCrowd is closed off to you.  You can use this time to review small companies, understand what makes them tick, and provide advice–especially if you have an expertise of use to the business.  How many opportunities do you have today to make such a difference?”

Indeed, the majority of crowdfunding sites offer a good deal more to investors than just the prospect of joint-ownership in the project of their choosing. They also offer the opportunity to provide expert advice in whatever capacity they are adept.

“The power of this collective knowledge is awesome!,” exclaims iCrowd.  “Become a contributor and add your own thoughts and ideas to discussions about potential investments. Provide answers to questions from the iCrowd community. Join an Advisory Board to offer your advice. Ask your own questions to understand more about investing.”

Ultimately, crowdfunding is more of a collective incubation program where experts and investors can meet promising new talent in any category—from the arts, to technology research and development, to new business start-ups.  And you control the degree to which you become involved, from simple investor to coach and guide.

Once the soon-to-be SEC regulation is in place, the discoverer of the next superstar talent or ground-breaking enterprise just might be you.

Joseph Cafariello