President Obama recently signed the Jumpstart Our Business Startups (JOBS) Act into law, making crowdfunding legal so web users can expect a return on investments in business start-ups.
Entrepreneurs can soon start tapping into their social network of online friends, giving business start-ups a welcome alternative to collect capital, compared to going through the timely process commercial banks impose. The waiting period for the act will end in January 2013. The CrowdFunding Made Simple conference took place last week, educating conference-goers about this groundbreaking new legislation.
Crowdfunding is the concept that creates a space for business start-ups to get financing from individuals through social media and online crowdfunding sites.
Jason Best, framework co-author to the legislation, described crowdfunding at the first annual CrowdFunding Made Simple conference last week.
“It’s social web meets capital formation,” Best said.
Unemployment and the economy are major issues this election year.
“We sold this as an american jobs/small business bill,” Best said.
Platforms like RocketHub and Kickstarter bring investors and entrepreneurs together in cyber space. The web community can browse through business plans of startups online and a person can put money into that idea.
Investors and entrepreneurs negotiate a rate of return, giving capital to a small business idea and a percentage to the web friend.
BYU student Colton Lee, 22, attended the function, wanting to learn how to find funds for future fortunes.
“It opens it up for everyone to invest in you,” Lee said. “I have lots of ideas and I want to get them funded.”
Traditional lending systems consist of several layers, Lee said. Before your idea reaches an underwriter it goes through approval processes that could take months.
Crowdfunding platforms have just one or two degrees of separation between investor and entrepreneur, Candace Klein, former Security Exchange Commission attorney, said.
She says crowdfunding platforms provide the table, and interested parties just gather around it.
Crowdfunding’s biggest challenge will be the potential for fraud, Klein said. The SEC will be paying close attention to activities involving unaccredited investors, such as ordinary web friends.
Best isn’t worried about fraud in this new community web environment.
“Fraud is exposed by the crowd,” Best said. He continued, saying members of crowdfunding platforms have identified, rated and removed fraudulent actors within 72 hours after the appearance of a threat.
Over 550 crowdfunding platforms are currently in operation — many with rating systems similar to sites like Ebay or Amazon.
Other forms of crowdfunding are legal. For example, if third parties invest money into a business idea, they select a gift for their contribution based on the amount given — such as a watch or pendant.
The SEC gets involved when investments earn interest. Up until now, crowdfunding didn’t offer a rate of return on an investment, just a token piece of swag.
The United Kingdom and other European Union nations have already passed similar legislation legalizing equity-based crowdfunding, meaning investors get a percentage back through interest rates.
The JOBS Act passed on April 5 and is pre-legal right now — the mandatory waiting period since passing the bill expires Jan. 13, 2013 and creates a crowdfunding exemption to SEC regulations.
In a time when banks and lenders sit on cash due to the uncertain economy, the innovative spirit of entrepreneurs transcends tradition and redefines social capital.
Best said if you go to Washington looking for answers, you won’t be effective. If you go to Washington with an answer, people are more likely to listen.