Crowdfunding was one of those Next Big Things that became bigger than perhaps anyone imagined, and it has developed into a substantial fundraising vehicle and moneymaker. And where there’s big money, can regulation be far behind? Crowdfunding, by definition, is:
“the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”
The crowdfunding phenomenon has been used to raise money to help fight cancer; support music groups; promote countries; raise money for business start-ups; and a huge number of other projects. Today there are companies that specialize in raising money by running crowdfunding campaigns. One such company is Kickstarter. Kickstarter says on its website that “thousands of creative projects are funding on Kickstarter right now.”
Since the website’s 2009 launch, Kickstarter says $850 million has been pledged by more than five million people funding more than 50,000 creative projects. Note the word “pledged.” With this kind of activity, you attract attention. A Huffington Post Business website post in September 2012 was headlined, “Failed Kickstarter projects: Where does the money go?” Kickstarter addresses that in its Frequently Asked Questions section with this question and answer:
“Can Kickstarter refund the money if a project is unable to fulfill?”
The answer:
“No. Kickstarter doesn't issue refunds as transactions are between backers and creators directly. Creators receive all funds (less fees) soon after their campaign ends. Creators have the ability to refund backers through Amazon Payments (for US projects) and Kickstarter (for non-US projects).”
With this kind of money – and corresponding risk - in play, the federal government and Securities and Exchange Commission became…interested.
With the signing in April 2012 by President Barack Obama of the Jumpstart Our Business Startups (JOBS) Act, equity crowdfunding became legal – and the SEC became the responsible agency for developing rules. In October 2013, the SEC released its 585-page compilation of proposed rules on crowdfunding. The 90-day comment period on the proposed rules ended Feb. 3. Rather than the freewheeling, wild west-style freedom to invest big, potentially win big, or get crushed big, the SEC’s proposed rules would put governors on the crowdfunding engine.
According to Entrepreneur Magazine, here’s an example of one portion of the rules:
"No company can raise more than $1 million in any 12 month period. Investors are allowed to invest up to $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000. If an investor's annual income or net worth is equal to or more than $100,000, then that investor can invest 10 percent of their annual income or net worth, whichever is greater. During any 12-month period, investors cannot buy more than $100,000 of securities through crowdfunding, the SEC said.”
All this could get expensive. According to Venturebeat.com, it might cost $39,000 to crowdfund $100,000 under the SEC’s rules. Crowdfunding up to now has represented complete freedom to win or lose. If the rules go into effect either as written or changed, the crowdfunding world will change.
Regardless of what happens, or when, financial caution is always wise. When the rules go into effect there’ll be accounting requirements and records to keep. In the interim, if you do invest the safest position to take is assuming your investment will go south. If it does you won’t be surprised. If you realize a return, it’s gravy.
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