Policy by the Numbers: Crowdfunding: connecting investors with start-ups

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 estimates, 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 “crowdfunding” -- 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:

Kiva has helped entrepreneurs in developing nations raise $243 million in loans since 2005.
IndieGoGo 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 Emmy's Organics 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.
Kickstarter has helped 13,000 projects raise 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 Seedrs 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 bipartisan support 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.
posted by Derek Slater, Policy Manager at Google

Policy by the Numbers

Crowdfunding: connecting investors with start-ups

No comments :

Labels

Archive

Feed

Disclaimer

Company-wide

Products

Developers