When Congress passed the Jumpstart Our Business Startups Act in April, it allowed young companies for the first time to sell stakes of their businesses to large numbers of investors — a practice called equity-based crowdfunding. But before startups can take advantage of this provision, the Securities and Exchange Commission must outline rules for exactly who can invest and how much they can contribute to each venture.
President Obama signed the JOBS Act in April 2012. The SEC is scheduled to deliver rules surrounding the crowdfunding provision by the end of the year. (Alex Wong/GETTY IMAGES)
The SEC is planning to announce the regulations by the end of the year, and the Financial Industry Regulation Authority will likely follow with its own set of rules.
The prospects for equity-based crowdfunding have led several companies to set up Internet crowdfunding platforms — “intermediaries,” according to the SEC — which connect potential investors to new businesses. Here’s a look at what some of them are doing while they wait for the rules to be formalized:
The fundraising platform Kickstarter may be one of the best known, but the company does not plan to move to an equity-based model, perferring its perk-based system, where people can seek small amounts of money in exchange for perks such as invitations to premiers or film credits. That creates an opportunity for a competitor such as Indiegogo,which intends to allow users to sell stakes when the rules are clear.
In the meantime, Indiegogo has been focusing its efforts on building its own community of users, chief executive Slava Rubin said.
As equity-based crowdfunding becomes more viable, Rubin said Indiegogo anticipates several new platforms cropping up in both the perks and equity based crowdfunding sectors.
“It’s going to be a little bit like the goldrush, with everyone thinking they’ll be able to capitalize on these laws,” Rubin said. But Rubin added that he supported equity-based crowdfunding in part because of its potential to create jobs.
In fact, Indiegogo has even made it possible for a potential crowdfunding competitor to get funded — “it’s a completely open platform, and it works within our philosophy,” Rubin said. With so many more funding sites, entrepreneurs will need to think more carefully about which platform to use, he explained.
To give Indiegogo an edge over the new crop of competitors, Rubin plans to develop educational guides for users so they can understand both perks and equity based investing and do his best to ensure that people come to Indiegogo with high quality campaigns. The site will also focus on supporting artists and entpreneurs through the campaign process, and feature testimonials to draw new entrepreneurs and investors. Most importantly, Rubin plans to beat out the competition by “gain[ing] the trust of customers” — this means keeping the platform clear of fraudulent activity and money laundering, he explained.
Navy reservist Lt. Marlon Terrell recently launched RepayVets, a Laurel, Md.-based crowd-funding site poised to help military veterans start businesses. Like Kickstarter and Indiegogo, RepayVets currently uses a perks-based model, but is limited to projects brought by veterans or servicemen. While the site has funded a handful of projects using the donation-based model — including a piece of athletic equipment manufactured and designed by a veteran — Terrell thinks equity-based crowdfunding will be essential to the success of his business and the ideas of his customers.
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