In 2011 “Crowdfunding” matured from a method to collect donations for small creative projects, to a formidable new way of investing in startups.  Battleground 2012 is about whether the US should update its antiquated securities laws to allow for Crowdfunding new entrepreneurial  companies.

First: What is Crowdfunding?  A brief overview …

One of the better definitions, from venture attorney and Crowdfunding advocate Scott Edward Walker: 

What is Crowdfunding?

As the term implies, “crowdfunding” is funding from a crowd of people — i.e., many people provide small amounts of money to finance something. Crowdfunding has its roots in charitable causes (including the advent of microfinancing to provide financial services to poor people), but has progressed to the online funding of creative projects via sites like Kickstarter and RocketHub.

More comprehensive definitions include:

Specifically though – the current issues and debates are surrounding investment/equity crowdfunding in the USA.    

May Startups Raise Funds via Crowdfunding?

No, startups are currently prohibited from selling stock or other securities via crowdfunding sites or social networking sites; they may, however, accept donations. This is because of federal and state securities laws which have been in place (in one form or another) since the 1930s, including the following:

• A prohibition against advertising or “general solicitation” — which means that a company may not offer or sell securities unless there is a substantive, pre-existing relationship between the company (or a person acting on its behalf) and the prospective investor.

• Disclosure and state law compliance requirements if the investors are not “accredited investors” — which usually makes the offering of securities too costly and onerous for a startup/

• A requirement that any intermediaries (including websites) must be registered with the SEC and applicable state securities commissions as a “broker-dealer” in order to legally accept any transaction-based compensation in connection with the sale of securities; and

• A requirement that any company that has 500 or more shareholders and total assets exceeding $10 million must register with the SEC and file periodic reports.

Here’s a rollup of what has happened in the Crowdfunding universe up until the end of 2011

In short, the startup world was excited and energized due to the introduction and passage of several bills (in the house of representatives) that updated securities laws to allow for equity crowdfunding of startups and small businesses.  But then …

In March 2012, the US House of Representatives overwhelmingly passed the “Jobs Act” which included the crowdfunding bill.

The Startup community is energized and hopfeful:   #WeCantWait   ….

The core portions of the bill that pertain to Crowdfunding:

Title II, Access to Capital for Job Creators. 

This portion of the legislation would remove the prohibition against general solicitation and general advertising in private offerings under Regulation D, provided that all of the purchasers of securities are accredited investors.

Title III, Entrepreneur Access to Capital. 

This part of the bill would provide an exemption for crowdfunding, by permitting offerings up to $1 million ($2 million in some cases), provided that investor contributions are limited to $10,000 or 10% of the investor’s annual income, whichever is less. Requirements targeted at investor protection are imposed on the issuer and/or the intermediary involved in the crowdfunding effort.

Title IV, Small Company Formation. 

This part of the legislation is what is commonly referred to as Regulation A reform, raising the limit for Regulation A offerings from $5 million to $50 million. 

Title V, Private Company Flexibility and Growth. 

This portion of H.R. 3606 increases the 1934 Act registration shareholder of record threshold from 500 to 2,000 (only 500 of which can be non-accredited investors). 

Still the Naysayers. opponents have a strong voice:

It’s ain’t over till it’s over (Summary)

At the end of 2011 there were several Crowdfunding related bill in congress:  Advocates were stressing the benefits for helping high growth entrepreneurial startup companies while opponents were stress the risks for investors being ‘scammed’.   In March 2012, the provisions of The House’s Crowdfunding bill were included in “The Jobs Act” which passed 390-23 votes.   Now the bill (and Crowdfunding portions) are being debated and considered in the Senate before changes are made or before it can be voted into law.

Yet the entrepreneurs,  thought leaders, and investors are excited and optimistic about the future of equity Crowdfunding in the US.

What could it all mean?

More resources and primers: