The JOBS Act: Acceptance of Crowdfunding Provision Likely to Increase Startup Growth

With crowdfunding a concern of JOBS Act critics, see what makes the capital funding method viable

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While small businesses have long been the engine that drives the U.S. economy, their efforts to raise capital, as well as access to it, can either help or hinder their growth. Startups are responsible for producing an average of 3 million jobs within the first year, while existing companies cut a million jobs annually. President Barack Obama signed the Jumpstart Our Business Startups Act, or JOBS Act, into law on April 5, 2012, which makes it easier for small companies to raise money, including through initial public offerings.

The JOBS Act has received support from lawmakers and startup advocates, as well as disapproval from critics who believe the bill could leave investors vulnerable to fraud and “pump-and-dump” schemes.  Producing favorable net job growth over the last 20 years, startups typically raise money through donations, lending and investments.  However, one of the newest methods of raising capital, crowdfunding, allows entrepreneurs to raise money cheaply by offering exemptions from SEC regulation, as well as disclosure policies to raise up to $1 million annually via websites from individual investors.  It is something that is bound to come into question while the Securities and Exchange Commission reviews the bill’s provisions.

With millions of dollars exchanging hands, regulation was imminent. Here are four reasons the JOBS Act was enacted:

  • Establish Investment Limits: Ensure investors do not exceed statutory investment limits by establishing standardized communication and reporting across all platforms globally.
  • Create Investor Protection: Establish investor Bill of Rights, criminal background checks on issuers as well as disclosures.
  • Establish standard communication processes: This would help to secure the information flow between the issuer, investor, and regulatory agency is impermeable.
  • Establish a code of conduct for crowdfunding platforms: There currently is not a universally established code of conduct that is shared globally across all platforms.

Kickstarter and Other Popular Crowdfunding Platforms

As of January 2012, there were over 400 crowdfunding platforms, according to Crowdsourcing.org.

Kickstarter launched in 2009, making crowdfunding mainstream and enabling entrepreneurs and small-to-mid-size companies, whether they are legally established or not, to raise capital without giving up equity.  In 2011, there were 27,086 projects launched on Kickstarter with $99.3 million pledged, an increase of $71.7 million from 2010.

The most successful Kickstarter project to date is the Pebble watch, which integrates with Android and iPhone devices. The founder surpassed their initial funding goal of $100,000 and raised nearly $8 million.

Kickstarter isn’t the only crowdfunding platform out; here are a few other helpful sites:

Indiegogo, the first and world’s largest open crowdfunding source founded in January 2008

Pozible, a crowdfunding and community network for creative ventures

Crowdrise, named “top 25 best global philanthropist” by Barron’s, is a combination of social networking, online fundraising and crowdsourcing

Crowdsourcing.com established an initiative, The Crowdfunding Accreditation of Platform Standards (CAPS), to promote the adoption of best practices across crowdfunding platforms globally.

Since the president signed the act, two equity-based crowdsourcing platforms have launched: Crowdfunder and Fundable.

In the end, the crowdfunding landscape will be changed forever.

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