The world of entrepreneurial finance is changing rapidly; we are at a tipping point that will make what seems like a vibrant part of our global economy today seem small in one year’s hindsight.Whether you are a service provider, social entrepreneur, angel investor, venture capitalist, or one of the millions of people ready to become a small-scale start up financier, it is time to pay attention
Estimates for annual crowdfunding transactions go as high as $500 billion annually compared to 2011’s $1.5 billion (anticipated to be $3 billion in 2012). If crowdfunding even begins to approach that scale, it will completely change the landscape for start-up financing.Jason Best and Sherwood Neiss helped lead the successful effort to get crowdfunding approved in the JOBS Act passed earlier this year. Niess explained that the folks as the SEC described themselves as “a reactive and not a proactive organization.” The SEC explained that they needed direction from Congress before they could do anything about crowdfunding equity. “We delivered an act of Congress. They weren’t expecting that.”
The Act gives rulemaking authority to the SEC and FINRA; Best and Neiss are now meeting regularly with regulators to help define the shape of these rules—which could determine the success or failure of the Act.
According to Neiss, regulators approach novelty with a focus on preventing fraud—it’s what they deal with every day. They aren’t in the business of creating jobs—even though that is the legislation’s intent.
Neiss explained that he and Best have helped to organize two groups to help frame the regulation and involve the people who will be most impacted by it: the Crowdfunding Professionals Association and the Crowdfund Intermediary Regulatory Advocates.
Neiss and Best recently wrote a piece for Venturebeat that explains the real issues that need to be resolved in the regulation. It is well worth the read.
WeSparkt founder Jonathan Blanchard explained WeSparkt’s focus on social entrepreneurship. Their new crowdfunding platform is designed specifically to take advantage of the JOBS Act to allow social entrepreneurs focusing on a double bottom line (profit and social good) to raise equity.
Blanchard sites a Monitor study suggesting that crowdfunding will grow to $500 billion annually. His site will target impact investors hoping to create social change.
Fam Mirza, a young entrepreneur who has never let convention get in the way of a good idea, has launched a new watch company called 1:Face Watch that is a for profit business that promises to donate a portion of its revenue to one of six causes—each one associated with a color (think bright pink for breast cancer). I bought a white watch, feeding 16 people via One Day’s Wages.
The watch is being sold through crowdfunding site Indiegogo, a popular crowdfunding site for social entrepreneurs. Mirza hopes to use the site as a launch pad, eventually allowing him to get the watch into the traditional retail channel.
Tim Harrington, founder of FiPath, an independent financial planning web site, has created what it calls “College Registry,” a tool for crowdfunding college savings. Families are encouraged to invite family and friends to donate to their kids’ college funds rather than buy them gifts that will soon break. Not a bad idea in a world where four years at Princeton could cost $300,000 in 18
a Partner at Crowdfund Capital Advisors, Neiss and Best’s firm, noted that there are presently 700 different crowdfunding companies in development. This is quickly becoming a crowded landscape.
Javan Van Gronigan, founder of Donate.ly, is creating a new funding platform for social entrepreneurs that focuses on the contributors’ ability (in this case, not investors) to invest directly in specific projects and track the use of the funds to its intended purpose on the ground. This would be in contrast to making an unrestricted donation to an organization that might then use the money for administrative costs.
Daniel Hirsh and Simon Erblich are trying to get a jump on crowdfudning with IPO Village. Using this open platform, they hope to complete their first crowdfunded initial public offering before the end of the year. They hope that by using a crowdfunding approach for an IPO for a tiny company that they can help the company avoid the death spiral financing patterns of other micro-cap, bulletin board and pink sheets’ financings. IPO Village takes no fees, creating the hope for a more efficient capital raising process for tiny companies. The IPO is being conducted under existing regulations regarding IPOs and not under new JOBS Act regulations. The registration statement for the first company being put forward is not yet effective; it will be interesting to see if it is approved with the creative new approach for an offering.
Joy Schoffler of Leverage PR, speaking for IPO Village, explained their objectives this way: IPO Village is “democratizing access to IPOs.”