Crowdfunding is about to get real.
Raising capital is a challenge for just about every startup. Crafting a compelling vision, refining the pitch, making realistic financial projections, and proving the market opportunity are hard enough, but for most, that's not even the hardest part. Finding interested investors can be daunting, especially when SEC regulations limit most startup offerings to 'accredited investors'.
There are several ways to meet the SEC definition of an Accredited Investor, but the most common way to qualify is to be:
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person
In other words, you need to be kinda rich. These rules exist supposedly to make sure that people don't put too much of their livelihood at risk in an investment with uncertain outcomes. If you're worth less than a million bucks, you probably aren't allowed to use ten grand to buy equity in a startup. Want to blow ten grand on a craps game? The SEC has nothing to say about it. Want to do your part to support a friend or try to fuel economic recovery? You'll have to pass the test first.
Last week, the US House of Representatives passed a bill that would allow crowdfunding as a source of capital exempted from SEC rules. If this bill becomes law (its chances look good,since it has support in the Senate and from the administration), startups could accept investments from crowds whose participants can kick in up to ten grand a piece, so long as the investment is less than ten percent of the investor's annual income. This means that even a poor graduate student making ten grand a year could be able to throw a thousand bucks at something invented by a colleague - and actually own some of the upside.
Opponents say crowdfunding creates potential pitfalls for entrepreneurs who may end up with too many investors to manage. They also claim that crowdfunding increases the chances that investors will participate in extremely risky, or even fraudulent offerings. Apparently, these naysayers believe that only millionaires can conduct due diligence. This not-so-soft bigotry can only be based on the myth that poor equals stupid.
Our economy and our country's morale is shackled by the belief that only the rich can get richer. I think that's a dangerous school of thought, but the harsh reality is that it is nearly impossible to build wealth on wages alone. In order to climb the economic ladder, you have to own something capable of appreciating in value faster than inflation. Cars and electronics will never do this. Real estate will only occasionally do this. The things that can appreciate quickly are the things that can also go bust. You aren't allowed to create wealth if you aren't allowed to take risks.
Crowdfunding will be good for entrepreneurs because it will expand the investor class. Now, if you've got a great pitch for an awesome product in a big market, you'll be able to search for investors in a haystack with a few more needles. It will also be good for the country, because ownership is good. Remember all that talk about how home ownership was good for the country? Turns out it wasn't so good when it wasn't real ownership. Equity in a startup is real ownership, not the myth of ownership sold by a lender. It's risky, but it's real.
