By now you’ve probably heard about crowdfunding, a fundraising concept in which many people contribute relatively small amounts of money via the Internet to collectively support a project, a nonprofit or a burgeoning business. Campaigns range from low-key to high-profile, from a couple thousand bucks to millions of dollars. Most “patronage crowdfunding” projects are in essence soliciting donations, not investments, and contributors won’t get any equity in return. But here’s the shakeup: In April 2012, the Jumpstart Our Business Startups Act passed, which could make way for a new kind of crowdfunding called “equity crowdfunding.” Under the JOBS Act, a business could source actual investments, which beforehand had to come from accredited investors and be registered with the Securities and Exchange Commission. Equity crowdfunding would mean more opportunities for investing for the average person and greater access to investors for entrepreneurs, which some say is a great new democratic approach to finance, and others think is a recipe for disaster in the form of fraud. Either way, we’ll have to wait for the outcome—the SEC still hasn’t made clear how these new provisions of the JOBS Act actually work, and until they do, investment experts consider it too risky to participate in equity crowdfunding.
IF YOU’RE A BUSINESS
$1,000,000: A small business could raise up to $1 million via equity crowdfunding over the course of one year without registering with the SEC.
IF YOU’RE AN INVESTOR
$2,000: The limit on what someone can invest via equity crowdfunding if his or her annual income or net worth is less than $100,000.
Kickstarter, the platform that is considered to have launched the crowdfunding phenom in 2009, hosts funding mostly for creative projects in categories like film, music and publishing. As of press time, the website had some pretty impressive stats.
98,091: Projects launched
$610 million: Dollars pledged
$517 million: Successful dollars
$66 million: Unsuccessful dollars (pledged dollars are not collected for unsuccessful projects)
43.9%: Success Rate
27,220: Number of successfully funded projects that raised between $1,000 and $9,999
31: Number of successfully funded projects that raised $1 million or more
Dance: Category with the highest success rate—70.93% (and also the smallest of Kickstarter’s thirteen categories with 1,316 projects launched)
Lisa Alexander, associate professor of law at UW, has researched crowdfunding as a means of economic justice—making funding more accessible to more people who otherwise face barriers in launching a new business. She sees the most potential for low-income, inexperienced or geographically isolated entrepreneurs. “Crowdfunding holds a real opportunity for [these] people,” she says. The UW prof penned an academic article arguing for a loosening of SEC disclosure regulations on crowdfunding investments under $250. More money, more problems?
Two Madison-based entrepreneurs share their Kickstarter specs and how they would feel about using equity crowdfunding
Founder, Bos Meadery
Project: Produce mead (beverage) commercially
Duration: 30 days
“I got the idea from a friend who had used it … it also got the word out.”
“I would not go for the equity crowdfunding option. My thought is that there is a danger in having a group of people similar to ‘shareholders’ that I would need to try to satisfy. I think it’s easier to stay focused on being a local, sustainable business that gives back to the community.”
Founder, FeLion Studios
Project: Complete “Made in “America” iron skillet collection
Duration: 30 days
“I was building an art piece that was beyond my means, and it was slated for exhibition at ArtPrize in Grand Rapids. ArtPrize was … the first to turn me onto what Kickstarter is. So I really had nothing to lose by giving it a shot, since it was a free opportunity to get something huge and meaningful to me completed.”
“We are more taking the ‘equity for start-up talent’ route right now, and internally offering this incentive to talented people who we want on our team … who not only own a part of the pie, but also own a skill set that complements and enhances what we’ve got now … It’s a great option when you’re a manufacturing start-up strapped for cash and looking to launch a new product line nationally.”
Grace Edquist is associate/web editor of Madison Magazine.