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April Rudin Headshot

Can Crowdfunding and Social Networks Forge Ties to Kickstart the Economy?

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Crowdfunding is yet another example of America's pent-up demand to "crowd together" for daily deals via GroupOn, to 'Like" and "Friend" people via Facebook, to content share by tweeting and re-tweeting on Twitter and so on. In this instance, the "crowd-sourced" buying power allows investors the ability to purchase stock and other securities tied to startups. This meet-up will occur via crowd-sourcing sites and social networks. It appears like a "win-win" for entrepreneurs looking for capital, investors seeking ways for investment transparency while simultaneously helping to kickstart our sluggish economy via bootstrapping startups with many smaller investors. It is hoped that a variety of new jobs will be created in this new investment sector.

The U.S House of Representatives passed a bill last week known as HR2930 -- the crowdfunding bill. It was championed by Rep. Patrick McHenry of North Carolina, a well-known conservative leader. I went to an event last week sponsored by The Soho Loft , where I had the opportunity to hear Rep. McHenry speak in person about the benefits of a new path to economic prosperity via this ecosystem. Nonprofits have used the crowdfunding platform successfully for many years.

Under current laws, startups are not permitted to sell stock or other securities. They may only receive donations through crowdfunding sites . A key component of this investor platform lies in the outbound communications and social media marketing build-out for each firm. This was proven by the most successful nonprofits success through mass donor outreach. In each case, the outreach was fueled through a consistent and constant variety of social media messages pushed through platforms such as Twitter, Facebook, FourSquare and others. Nonprofits were among the early adopters of social media platforms as a way of creating visibility and raising money for causes. Success by the nonprofit sector has drawn the interest of startups.

The eventual passage of this bill would propel the growth of sites like Kickstarter, Rockethub and others as new small-ish investors will clamor for access. It is expected that a significant number of entrepreneurs/startups will race to the market with a variety of products and offerings to help meet the demand. This outreach and deal matchmaking will happen on social networks such as Twitter and Facebook. Social media sites are the meet-up mechanism to connect sellers and buyers. Social media sites can then be used to promote these investments as long as they comply with the same guidelines outlined in the proposed crowd-funding bill. The significance of this bill cannot be overstated to the overall investment community -- both buyers/sellers.

Provisions of the bill include: companies may raise a maximum of $1 million or $2 million if the firm provides audited financial statements. Each investor is limited to investing an amount equal to $10,000 or 10 percent of his/her annual income. Finally, the issuer of this new "stock" must disclose the speculative nature of this type of investment and any limitations on liquidity of the stock. The bill further requires the issuer of the stock to ascertain the investor is aware of the risk and other SEC notices providing for governance of investments.

While expected to provide stimulus, there are some downsides to crowd-funding funds for startups. All issuers/startups must be mindful of any individual state law governing minority stockholders interests including voting rights, inspecting the books, etc. The administrative costs and burden of a potentially huge group of small stockholders presents certain overhead costs in record-keeping, etc. Finally, there is speculation that companies which use crowdsourcing will have difficulty attracting venture funds and other more "sophisticated" investors who will want board positions to more closely control company growth. These board positions will carry large liability due to the unwieldy, disparate larger group of unsophisticated investors.

David Drake, one of the co-founders of The Soho Loft Capital Creation Event Series, is enthusiastic about this opportunity. He is also founder and Chairman of LDJ Captial in NYC where his passions for energy, efficiency and real estate investments which intercorrelate directly with the technology, media and telecom investment strategies of his firm. His premise is that our current market system rewards short-term traders rather than investors. This is just one of the reasons that he supports crowdfunding.

This notable moment in history is rooted in economic growth but also demonstrates the ushering of social media into Wall Street. All investors will now be able to participate in deals like never before. Barriers to entry in alternative investments are being reshaped. Social media platforms are in place to facilitate the conversation, idea exchange and commerce presented by these new investment opportunities.

Next step is to see if the Senate quickly passes a similar bill. This is expected along with the White House's support for this new option of entrepreneurs to meet their potential new investors along the social media highway. The opportunity to locate and participate in these opportunities will be primarily on social networking platforms. It continues to surprise me that so many of my peers continue to eschew the importance of these platforms. Social networking platforms are not a fad, and not expected to "go away." It reminds me of when I bought my grandmother her first microwave and she said that I should take it back as it only melted cheese!