“Crowd funding” bill clears senate
The first time “crowd funding” for startup companies was explained to me I thought it should be renamed to “cloud funding.” Anyone willing to invest small amounts of money into startups with no collateral, loan documents, or regulatory restrictions certainly seemed to be someone with his or her head in the clouds.
Crowd funding, sometimes called crowd-sourced capital, is the pooling of money to support the efforts of new ideas or other initiatives with which the funders share some common interest. The money is usually collected through the Internet.
The recently passed crowd-funding bill requires companies to register with the Securities and Exchange Commission (SEC) and provide tax returns if they use crowd funding. This is not a big deterrent to those who will move to make this into a new commercial industry. Credit is due to Colorado Senator Michael Bennet for pulling off the final Senate compromise that sent this bill to the President’s desk.
Crowd funding has been happening for years. Natural disasters often create a crowd-funding response. Now it’s set to fund commercial ventures in a big way.
Some of us remember the “penny stock” businesses that flourished in Colorado in the 70s and 80s. It made millionaires and paupers out of many a “get-rich-quick” wannabe. In Denver, the industry’s poster childBlinder Robinson and Company--collapsed in the late 1990s after taking millions of dollars from questionable or fraudulent stock sales.
Is crowd funding for business ready to do the same? Let’s give that a qualified “maybe.” With lower regulatory and legal standards for “entry and reporting,” the new industry will invite speculators, hucksters and, of course, the Nigerian prince who needs help getting his money into your bank accounts, or vice versa.
But, we would argue that crowd funding fills a gaping hole in how small businesses, with great ideas, find capital. Virtually every successful startup company is driven by the passion of its founder(s). That’s followed by the founder emptying his or her savings and mortgaging his or her house. This is followed by convincing their friends and others of the potential payoff from their new enterprise. This funding mechanism is called “friends, fools, and family.” It’s the tried and true American startup path.
But what if Congress made it easier for you to broaden your funder base—people you don’t know? Maybe those people are looking to make a quick buck or maybe are just interested in (and understand) your new idea. Crowd funding makes these types of investors available.
There are limits in how many times the fund can go for new cash and the actual cash the fund can receive. This is all intended to reduce risk to the investor, which is a good idea. However, this type of financing, popularized originally in philanthropy and later migrating into film and social enterprises, is now going commercial.
Why does this matter to Colorado? In the decade ending in 2010, Colorado companies that had actual employees added NO NET NEW JOBS—for the ENTIRE decade. It was a bad run. But the region added 130,000 jobs—all “non-employee firms.” In other words, 130,000 individuals started their own firms. Throughout that same period, state and local governments were scrambling to create greater access to capital. While state and local government efforts to increase capital access are laudable, they’ve simply never been very good and have failed to reach any large audience of entrepreneurs.
Crowd financing goes directly from the investor to the entrepreneur. The cost of financing drops dramatically and economies of scale, required in most loans, is reduced since administrative costs are substantially reduced.
We don’t know how those 130,000 intrepid entrepreneurs would have fared if crowd funding was available a decade ago. But I think we’re willing to concede they would have had a lot more Facebook friends and probably would have created a lot more jobs than just their own. Let’s watch this innovation closely. Colorado may be one of the biggest beneficiaries.