Will Equity Crowdfunding Laws Be the Death of Kickstarter?
There have recently been some angry grumblings from the blogosphere about the government wanting to stick its fingers in the crowdfunding pie. The concern across the internet seems to be that new regulations will destroy the rapidly-growing crowdfunding industry that brought us the Pebble Watch and the Veronica Mars movie.
I am here to paraphrase Mark Twain and assure you that the rumors of Kickstarter’s death have been greatly exaggerated.
The JOBS Act and the proposed SEC rules have nothing to do with Kickstarter or any rewards-based crowdfunding site. The SEC rules only apply to equity crowdfunding, where a company is selling stock or equity from an online crowdfunding site. In fact, Kickstarter has already said it will not participate in equity crowdfunding, and most rewards-based crowdfunding sites will not do so either, primarily because of the extremely high cost of compliance.
Under the Jumpstart Our Business Startups Act (The JOBS Act), anyone who wants to start or grow a business will be allowed to use an online equity crowdfunding portal to raise up to $1,000,000 by selling stock in their company.
Those who do not have a million-dollar brokerage account at Merrill Lynch and could not get in on the Twitter IPO will be allowed to buy stock in the “next big thing” and be on the ground floor just like rich, accredited investors can do today. And those who need $500,000 to start a business but can’t get a bank to return your phone call will be able to use the JOBS Act to raise money online by selling part of your company to everyday folks who want to help you build your business.
The JOBS Act is nine pages long and pretty simple to understand. The concept was to help the economy recover by getting funding to small businesses and creating jobs in the process. It was passed by congress with overwhelming bipartisan support and was signed into law in April 2012.
In late 2013, the SEC released 585 pages of rules, regulations and compliance requirements that, by their own calculations, could cost a new business as much as $30,000 to raise $100,000. Those of us who deal with securities laws were not surprised that the SEC was making crowdfunding under the JOBS Act difficult, expensive and filled with regulatory pitfalls.
For those who are excited about JOBS Act equity crowdfunding though, don’t be scared off by the apparent high cost and the seemingly insurmountable compliance issues. As it rolls out, individuals and businesses will employ creative means of making the JOBS Act work and filling the $1,000,000-and-under funding void that was formerly occupied by banks and angel investors. Broker-dealers scared off by the liability and costs of funding smaller raises will have new resources from innovative entrepreneurs that want to see equity crowdfunding work and become the trillion-dollar industry many predict it will become.
Kickstarter fans can rest assured that these new rules will not affect the rewards-based crowdfunding phenomenon -- at least for the moment. We all know that governments will eventually see the billions of dollars passing tax free through the rewards-based crowdfunding system and will want a piece of the action. Let’s all hope that congress manages to stay gridlocked enough that they never get around to doing so.
Related: The JOBS Act: What You Need To Know