Crowd dynamics, crowd innovation, crowd creativity, crowdsourcing…crowdfunding. All represent the collective power realized when individuals act together. While some of these terms recall longstanding models of behavior, the power of the crowd is creating a new revolution supporting entrepreneurs who seek financing for their business ventures.
About Crowdfunding
Crowdfunding started as an approach based in social media converting the traditional local fundraising efforts led by charitable organizations, creative ventures and even political campaigns to widespread online campaigns. Numerous crowdfunding sites have popped up offering venues for fund-seekers to post projects in need of a pre-determined amount of funding. Capital is typically pledged by funders in exchange for personal satisfaction and/or tangible rewards. The entrepreneurs' offer of equity in exchange for financing has not survived in the crowdfunding phenomena primarily because in such cases the crowdfunding model constitutes a general solicitation and offer to sell a security when an equity interest is offered in exchange for funds.
This may be about to change. Pending legislation may pave the way for crowdfunding platforms to provide small and medium sized businesses with capital-raising opportunities in exchange for equity.
Pending Legislation Permitting Crowdfunding
As the result of a petition to Congress from the Sustainable Economies Law Center in July 2010 (which the Law Center made possible through crowdfunding), three bills are currently pending in Congress that would permit crowdfunding for private offerings of securities. A fourth pending bill would direct the Securities and Exchange Commission to relax the general solicitation prohibition in Rule 506, the widely-used SEC exemption for private offerings. This same concept was recently recommended to the SEC by its Advisory Committee on Small and Emerging Companies. For more on the pending bills, click here.
Opening the Door to General Solicitation in Private Finance
Concerns over the adequacy of investor protections appear to have slowed the Senate's enthusiasm for the application of the crowdfunding phenomenon to equity investors in small business. However, separate steps taken by the SEC's Advisory Committee on Small and Emerging Companies and the House of Representatives may pave the way for the passage of crowdfunding legislation. For more on action taken by the Advisory Committee, click here.
The next step beyond permitting general solicitation in this context could be to provide that general solicitation may take the form of crowdfunding, which may be enough to permit small businesses to approach unaccredited investors—if crowdfunding legislation can balance investor protections with the power of the crowd.
For More Information
If you have questions about crowdfunding, please contact your Polsinelli Shughart attorney, or Kelly Sullivan-Deady at 816.360.4278 or ksullivan@polsinelli.com.
