Sunday, October 27, 2013

Crowd Funding: As the Market Evolves

Last week, the U.S. Securities and Exchange Commission (SEC) unanimously voted on proposed rules allowing a broader set of investors to buy equity in small private companies through crowd funding exchanges. SEC Chairman Mary Jo White said, "There is a great deal of excitement in the marketplace about the crowd funding exemption" and “we want this market to thrive, in a safe manner for investors." NOTE: The process of finalizing the SEC’s rules may take until the summer of 2014.

While interest in crowd funding has grown significantly in recent years, regulatory restrictions have limited many small businesses to promoting and selling products, services and events that were still in development. In this process, the crowd funding exchanges provide a forum for small business to present videos and business plans about themselves and their efforts in the hope of connecting with new customers and investors.

Prominent Crowd funding exchanges include Kickstarter, Indiegogo and Fundable; with market leader Kickstarter raising $844 million for 50,623 projects since it started in 2009. In addition, while some technology and video game projects have raised over $1 million, the overall funding success rate is 43.9% for projects promoted on Kickstarter, with the highest success rates in the areas of music, theater and dance.

The SEC’s changes should permit small companies to sell equity stakes to non-accredited investors with less than $100,000 of annual net. Companies using crowd funding exchanges to sell equity will be limited to raising $1 million in funds every 12 months.

  • Historically, funding for startup businesses came from friends and family, angel investors and venture capital firms - that may provide business guidance and connections. The SEC’s proposed rules could significantly expand the funding sources for these businesses.
  • While the SEC’s changes may increase the flow of “dumb money” into the market, it is unlikely that crowd funding’s “dumb money” track record will differ from other investment markets.
  • Finally, while funding sources may increase, crowd funding is not a short cut to business success – which still requires a lot of planning and execution.

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