Policy by the Numbers
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Crowdfunding: connecting investors with start-ups
Thursday, December 8, 2011
New businesses drive
economic growth and job creation, but today entrepreneurs are facing a global capital crunch. By some
only 2.3% of startups are able to receive private financing of any kind. That’s why policymakers ought to take a close look at a new investment model called “
” -- and how they might fix laws that could hold it back.
Imagine you need money to start your business. Instead of raising lots of money from a few people, you can raise little bits of money from lots of people, the “crowd.” You can do this through a variety of web services, which enable you to instantly ask for funding from the billions of people online today.
Consider the following examples:
has helped entrepreneurs in developing nations raise $243 million in loans since 2005.
has helped over 50,000 projects around the globe get funding -- from
bakeries to baby blankets, 3D printers to grocery stores, t-shirts to iPad accessories. For example, banks turned down
for a small business loan, but the founders were able to use IndieGoGo to raise $15,000 to start their bakery in Ithaca, New York and are now selling in 25 states.
In aggregate, IndieGoGo projects raise millions of dollars every month.
has helped 13,000 projects
one million funding pledges totaling over $100 million dollars.
For instance, Steve Taylor raised more than $300,000 to adapt the best-selling book
Blue Like Jazz
into a feature length film.
So what does this have to do with public policy? Businesses that use these platforms generally distribute non-monetary rewards to investors, like special versions of an album or a band poster. But if they’d like to give the crowd of investors a financial return, like a stake in the company’s profits, that could be illegal.
For example, in the U.S., the Securities Act of 1933 places limits on soliciting investments from the public at large and on receiving funds from non accredited investors. And while crowd-investing platforms like
are developing in the U.K., legal barriers are also present
in Europe as well
These regulatory barriers were created with good intentions: preventing fraud and facilitating trust in the stock market at a time when it was difficult for a prospective investor to get information about a business. Back then, less than 5% of people invested tradable securities. Today, more than 50% of people invest in the public markets and information is relatively abundant. In the future, investment accreditation courses could be offered online, and Yelp-like platforms could help people determine what’s a good or bad investment.
As technology changes, policymakers are rightly asking whether laws need to be updated. In the U.S., there’s
to change regulations in ways that would enable crowdfunding while protecting against fraud
Crowdfunding legislation, if implemented well, could jumpstart a new model of job creation and investment. Countries looking for ways to attract foreign venture capital or unlock access to domestic capital could focus on empowering their nation’s inventors by connecting them with investors, wherever they may be. In turn, crowdfunding could be a critical piece of the economic recovery puzzle.
Derek Slater, Policy Manager at Google
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