It’s Innovation Month here at LegalZoom and we’re exploring a range of themes around the concept of innovation.
When it comes to finding money to launch a great product or idea, gone are the days of begging for money from traditional sources. While banks, friends and family still provide support to many fledgling businesses, some individuals and small organizations are harnessing crowdfunding to make their dreams a reality.
You’ve probably heard of Kickstarter or Indiegogo or RocketHub. These sites allow innovators to start a campaign for their idea and ask for funding from anyone out there who might be interested. In exchange, the contributor may get a limited-release gift, a credit in the production or even the first generation version of the product. The “Veronica Mars” movie started as a listing on Kickstarter, and just this month LeVar Burton raised $1 million in one day to bring back the hit TV series “Reading Rainbow.”
This exchange of money for access is called rewards-style crowdfunding. According to a 2013 report, the global “we” has raised $2.7 billion for more than a million passion projects. It’s clear that the people are out there and they’re willing to put their money where their, uh, keyboard is.
A second type of mass fund collection system is called equity crowdfunding. More than two years ago, President Obama signed into law the JOBS Act (short for Jumpstart Our Business Startups), which allows anyone to become an official investor in “emerging growth” companies. Equity crowdfunding takes the best part of a platform like Kickstarter—the broad reach and individual contributions—and combines it with a stake in the businesses. Contributors are no longer just fans of the idea; they are now more deeply invested in the product’s success—and potential profits.
The JOBS Act is currently under review by the U.S. Securities and Exchange Commission but is widely expected to pass later this year. Once approved, it would allow companies to sell up to $50 million in shares and list up to 1,000 shareholders.
With the ease of collecting seed capital in this way come certain challenges that some analysts fear might be cumbersome for extremely small organizations. Part of the JOBS Act calls for the release of financial reporting and documents, including early stage business plans and equity compensation plans. However, as one analyst mused, putting up your business for equity crowdfunding could validate key parts of the business and its measures of success on a broader scale.
Equity crowdfunding eases some of the restrictions around raising capital as it is currently done and could be a boom for smaller start-ups without access to large networks of investors or venture capital firms. In an industry hell-bent on disrupting other industries, it’s almost as if Silicon Valley has found a way to disrupt its own way of doing business.
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