As regulators set rules for equity-based crowdfunding, investors prepare for its impact

The investment sector may soon get more crowded.

The passage of the federal Jumpstart Our Business Startups Act earlier this spring will allow entrepreneurs to solicit investments from ordinary people in exchange for a slice of the payout should the company happen to strike it big.

(Jeffrey MacMillan/Capital Business) - Kirsten Luxbacher, left, and Amanda Rogers flip through a copy of The Runcible Spoon, which covers the D.C. foodie scene.

(Jeffrey MacMillan/Capital Business) - Sara Hanks, chief executive of Alexandria-based CrowdCheck, which conducts background checks on companies seeking crowdfunding.

But while the shift, called equity-based crowdfunding, should make it easier for fledgling ventures to raise capital, traditional investors are watching with a wary eye to determine how the prospective tsunami of micro-investors could disrupt business as usual.

For now, though, there may be more questions than answers. Federal regulators are in the process of crafting guidelines that aim to protect unwitting investors from scams while fulfilling the legislation’s primary goal of giving entrepreneurs greater access to capital.

“There are lots of good questions that need to be asked and probably will be addressed, but they’re still outstanding,” said Julia Spicer, executive director of the Mid-Atlantic Venture Association. “And until those are determined, you don’t know what the impact of that is.”

Crowded competition

The big promise of crowdfunding has been geared almost entirely toward entrepreneurs. The ability to raise funds through their social channels and the Internet at large allows them to bypass the checkbooks of traditional investors, which in the earliest stages can often determine whether or not a venture ever gets off the ground.

That’s been a source of great frustration for entrepreneurs whose businesses fall outside of the sectors that tend to attract the most interest from venture capitalists, such as Internet technology, social media and software.

“It creates another option for entrepreneurs to access capital that gives them more control over their ability to raise capital and control who they get capital from,” said Steve Case, the chairman and chief executive of District-based investment house Revolution.

But more options for entrepreneurs means more competition for investors. Paul Singh, a partner at 500 Startups, a seed fund and accelerator program, said that will likely force angel investors and other wealthy individuals to battle for deals using more than just dollars.

Singh, who splits his time between Northern Virginia and San Francisco, said the professionals will likely pitch their expertise and the other resources they can bring to bear, whether it is engineering advice or legal help.

“As a general rule of thumb, money has become the commodity,” Singh said. “Founders are going to gravitate toward the value added rather than the money.”

Regulatory questions

The guidelines that the Securities and Exchange Commission is drafting will determine, at the most granular level, how crowdfunding will be structured, including how much information companies and their investors must disclose.

Case, who sat on a presidential committee on entre­pre­neur­ship, argues that flexibility for entrepreneurs and fraud protection for micro-investors should be front-of-mind for regulators as the rules are written.

“Lower on the list is trying to structure this in a way that’s of interest or benefit to the incumbents in terms of traditional venture capitalists,” Case said.