Today, the SEC is scheduled to vote on crowdfunding. Remember, the SEC never wanted to have to rule on this at all. They wanted lawmakers to keep the status quo, so having this tossed in their lap along with all the other things they have to do is bothersome.
It’s never good to send bothersome things to a federal regulator.
They were a bit heavy handed the first time through. But there is hope for some changes this time. Here is what the language looks like:
Businesses using crowdfunding could raise no more than $5,000 a year from someone whose income or net worth is less than $100,000. Investors with income or net worth greater than $100,000 could contribute as much as 10 percent of their annual income or net worth, to a maximum of $100,000 in one year
The proposal doesn’t require businesses or funding portals engaged in crowdfunding to verify compliance with those restrictions. Instead, a crowdfunding portal must ask investors to disclose their income or net worth as a means of determining compliance.
The first part is a change, and the second part is a significant change. The previous ruling forced individual companies to certify the investors had the net worth to put money in their companies.
The individual freedom lover in me thinks that independent people ought to be able to do anything they want with the money they earned.
Portals that engage in crowdfunding will add a lot of efficiency to the market for companies to raise money from people that earn less than $100,000 per year. As a startup, it does me no good to run around and do powerpoints for investors who’s max is $5000.
Will this change things?
In some sense it will. If you are an active angel, you will have more access to deal flow, and entrepreneurs more access to you. How you add value as an angel to a company that you invest in over the web remains a question. The other question that remains is how do you sift through online resources to make an intelligent investment decision?
Crowdfunding will end the “follower” approach for also ran VCs. They are out of business. VCs that add value will get more deal flow, and raise bigger funds.
Larger VCs will establish smaller seed funds. They might be very smart to establish regional seed funds that act as a funnel for deal flow to their larger funds. VCs have traditionally had trouble scaling. Additionally, they haven’t had the incentive to scale because Silicon Valley is so thick with good deal flow they haven’t had to. But the game is changing quickly.
There is plenty of high quality deal flow in places like Chicago, Madison, St. Louis, Columbus, etc and the coastal VCs are missing out. Establishing a small regional seed fund could make a lot of strategic sense for them. Think of it as a farm team for their larger funds.
One of the gigantic hurdles we have in the midwest is access to capital. Midwestern investors have generally been cool to venture funding. They don’t understand it. It’s a private equity type of world. One of the tenants of Hyde Park Angels when we started was to educate both investors and entrepreneurs in the midwest about how all this works. Take the mystery away, and you might get more participation.
Crowdfunding might be a real help to develop entrepreneurial ecosystems that are cash starved. I emphasize “might be”. I don’t think crowdfunding is the silver bullet. It’s just another tool in the arsenal. and everyone on both sides of the table needs to realize that. But, if companies begin to raise capital with crowd funded money-and have successful exits, the landscape will change in a hurry.
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