But risk is inherent in any business transaction, particularly investment deals. Statistically, far more start-ups fail than become banner companies with millions in revenue each year.
“By definition, a lot of people who invest money will lose money. That kind of goes with the territory,” Case said. “People have the option to lose money if they go to Las Vegas, and people seem to think that’s OK.”
Still, mitigating fraud will likely prove critical if crowdfunding is to earn and maintain the trust of lawmakers, regulators and micro-investors.
Alexandria-based CrowdCheck conducts background checks on companies seeking equity-based crowdfunding and expects it will charge between $1,000 to $10,000 per case, depending on the depth of its investigation.
Founded in January by Sara Hanks, who once served as general counsel of Congress’s now-defunct Congressional Oversight Panel, CrowdCheck will also help entrepreneurs navigate disclosure requirements.
“We’re trying to offer a stamp of approval,” she said. “It’s a high-touch process that peels back many layers of a company so investors can make informed decisions.”
Follow-on investments
For those companies with blockbuster potential, crowdfunding alone simply won’t provide enough money to support high-velocity growth. Venture-backed firms such as Arlington’s energy data provider Opower or LivingSocial, the District-based daily deals purveyor, have required tens or hundreds of millions from investors.
That means some crowdfunded ventures will find their way into the traditional venture capital pipeline.
“The question is are there unintended consequences if you have crowdsourced funding? If you have 2,000 investors and you move to get institutional financing, how do you reconcile that?” said Spicer of MAVA.
Attorney Aaron Ghais of Shulman, Rogers, Gandal, Pordy & Ecker in Potomac said the answer is a tricky one. Venture capitalists may hesitate to offer financing down the road in order to avoid any liabilities of tangling with hundreds of shareholders.
Some crowdfunding intermediaries have plans to address those concerns. Miami-based EarlyShares.com, for example, plans to package multiple investors into single-entity corporations.
In the past 90 days, EarlyShares.com has received 250 applications from small businesses, 60 percent of which are established companies with less than $5 million in revenue. About 6,000 investors have registered with the site since the company formed in November 2011.
And this site is not alone. Even though crowdfunding platforms cannot process any transactions until SEC guidelines have been adopted, a host of Web sites are already preparing for the green light.
“There are over a dozen platforms that are in some state of being built. There are some really smart dedicated folks who are working in places all over the country to put these platforms in place right now,” said Jason Best, a co-founder at Startup Exemption, an advocacy group that pushed for the legalization of crowdfunding.
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