Crowdfunding, the concept behind popular websites like Kickstarter and Indiegogo, is gaining traction as a way for entrepreneurs to raise startup funds. According to a recent Wall Street Journal article, nearly a dozen states have enacted or proposed policies allowing entrepreneurs to use “equity crowdfunding,” or selling small amounts of equity to many investors to fund new business ventures.
The article profiles several ventures in Georgia, Kansas, and Wisconsin and notes that current state crowdfunding programs have produced mixed results. For small, local shops and restaurants that would not ordinarily attract professional angel investments, crowdfunding can be an effective way to raise money and get the community behind an emerging business. On the other hand, it takes a lot of effort to get the general public interested in investing in a business—one of the profiled entrepreneurs called it a “full-time job”—and follow-on investors may not be interested in funding a company where many people own small stakes.
The 2012 federal JOBS (Jumpstart Our Business Startups) Act modified federal law to allow equity crowdfunding and required the Securities and Exchange Commission (SEC) to develop implementing rules. Although the SEC released draft rules in October, it will not finalize the rules until the public comment period finishes in February. These state policies come ahead of the federal effort and provide a state-level test run of the concept.
