Move Over SEC: Crowdfunding Entrepreneurs Don’t Need You
EspañolBy John Breeden
Entrepreneurs are tired of waiting for the SEC’s final regulations on crowdfunding more than a year after they were scheduled to be in place. For the less technically literate, online crowdfunding is a money-raising technique where a businessperson can pitch their idea for a movie, video game, or clothing line they’d like to create to online investors. With online crowdfunding platforms like KickStarter, Indiegogo and Crowdfunder, bringing creative and inventive ideas to life has never been easier. The SEC’s involvement will only jeopardize this fountainhead of innovation.
A little more than two years ago, President Obama signed the Jumpstart Our Business Startups Act (JOBS) of 2012, a bill meant to help new businesses raise capital and go public. Obama referred to it as a “game-changer that would remove barriers that prevent small businesses from growing and hiring.” The JOBS Act was meant to free up businesses from archaic regulation brought about by the 1933 Securities Act, rules created decades before the advent of the internet. While the law’s goal of cutting red tape is undoubtedly beneficial, it would still leave mountains of regulation for startups to climb.
Typically with reward-based crowdfunding sites, creators of the project set predetermined donation categories of varying amounts, with each category getting its own unique reward or bundle of goods. The reward can be anywhere from receiving a thank you card to having your own small role in a movie. Entrepreneurs pitching their campaign are allowed to offer nearly any type of reward, as long as it isn’t money or a piece of the business.
For example, actor and director Zach Braff raised US$3.1 million for his film Wish I Was Here through more than 45,000 fan donations from Kickstarter. After premiering at Sundance, the movie picked up distribution rights for $2.75 million, more than 90 percent of the funds raised on Kickstarter, and all done before a theatrical release. Traditionally, this money would go back to investors, but it can’t with online funding.
If an entrepreneur were to offer money or a portion of their business as a reward, they would instantly become subject to securities law and regulation by the SEC. These “protections” require the business to adhere to an exhaustive list of rules and regulations. They range from having to submit audits and financial reports to the SEC, to capping the amount an issuer can raise in a year.
What is most concerning about the SEC’s rules is that it creates such a large barrier for entrepreneurial Millennials, who might wish to offer financial reward. Young entrepreneurs do not want to be held back by ancient regulations that no longer serve its purpose, jump through hoops at huge banks and investment firms, or deal with the bureaucratic process required with an initial public offering. They simply want to create and share. The internet has allowed for this in so many new ways that couldn’t even have been imagined ten, or even five, years ago. The ability to pitch an idea on the internet to millions of people you’ve never met before and offer a return on their investment is the natural evolution of internet commerce.
Equity crowdfunding offers so much potential for future inventors, artists, and philanthropists. It should not allow for this to be lessened, in any way, by the SEC. The bureau has been dragging its feet on establishing clear rules so much that some states have decided not to wait and are issuing their own. As Elizabeth Chandler, an associate with Godfrey Kahn SC in Milwaukee, explains, “I think a lot of people were tired of waiting for the SEC. In recent years, there have been a lot of people in Wisconsin looking at how to grow jobs or attract venture capital. I think when they saw crowdfunding, all those things coalesced.”
Policymakers should step out of the way to allow crowdsourcing platforms to experiment and make the rules for their users. This would be the most effective way to determine what will work best for both the creators and the investors. As the Competitive Enterprise Institute’s John Berlau explains, “The successes of electronic marketplaces from eBay to Kickstarter shows that the SEC need not reinvent the wheel in making rules for crowdfunding portals, and it shouldn’t be surprised if equity crowdfunding produces innovation in wheels and many other products.” Kickstarter, Indiegogo and other crowdsourcing platforms should be allowed the freedom to set their own rules; the SEC should simply get out of the way.
John Breeden is a Young Voices Advocate and economics student at West Virginia University.