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Real Crowdfunding Options for Startups on the Horizon?

I’ve covered the topic of crowdfunding pretty exhaustively in the past – there is huge potential that can be unlocked if startups could raise meaningful amounts of capital in exchange for equity online from a large number of small investors. As promising as the idea is, there have always been SEC regulations that have made it difficult, if not impossible for a true crowdfunding platform to exist. However, this might all change sooner rather than later. There have been a couple of very interesting movements on the regulatory front regarding crowdfunding since my last post on the topic:

  • President Obama’s American Jobs Act supports establishing a “crowdfunding” exemption from SEC registration requirements for firms raising less than $1 million with individual investments limited to $10,000 or 10% of investors’ annual income. It seems as though this would eliminate the accredited investor requirement under SEC Regulation D (limiting investment opportunities to those with a net worth of over $1 million or income of over $200,000 per year).
  • California Congressman Kevin McCarthy has introduced the Access to Capital for Job Creators Act. The proposed act would alleviate the “general solicitation” ban that is currently in place under SEC Regulation D. The ban prevents private companies from raising capital from individuals who they do not clearly have a pre-existing relationship with. The legislation would remove the solicitation ban and allow companies to raise capital from accredited investors nationwide, or even globally. Apparently the proposal could be packaged with another group of bills which include the expansion of the “500 shareholder rule.”

If successfully passed, these two pieces of legislation would help overcome two of the major hurdles that prevent true crowdfunding from becoming a reality for startups: the general solicitation ban and requirement that capital only be raised from accredited investors. Interestingly, the SEC had recently taken into consideration a petition for rules to be eased for crowd-funding share issues of up to $100,000, but the American Jobs Act would place the limit at $1 million – a substantial improvement that makes it more realistic for startups to raise meaningful amount of capital via crowdfunding.

In the past I’ve shared how Profounder, who I thought was a leader in crowdfunding, struggled to get traction because it was hindered by regulatory issues. Well apparently, the team has been involved in helping shape the legislation and would benefit greatly if it was passed. Further we could see sites like Kickstarter pivot and move beyond just funding for artistic endeavors.

What would these changes mean for angel and seed investing? I think ultimately there would be even more startups being funded than there are now (a great thing). Crowdfunding would be a complement to traditional angel funding, but not necessarily a replacement. Sure, some startups that would have chosen angel funding might instead use a crowdfunding platform but there is still plenty angles bring to the table – expertise, a network and the ability to provide funding with one check. If anything, crowdfunding would probably compete more directly with, or replace, friends and family rounds. Either way, true crowdfunding would be great for the startup ecosystem and the economy.

If crowdfunding does take off we will for sure see a proliferation of new crowdfunding platforms. There would also be other opportunities for businesses in the new industry, particularly in the area of trust. Examples include crowdsourcing due diligence firms for investors or company verification/certification firms. Who knows, there may even be a possibility for a crowdsourced venture fund. As always, it will be interesting to see how things shake out. I’ll share updates in this space as they become available.