THE BLOG

Passing the Hat in the Digital Age

07/11/2013 11:28 am 11:28:52 | Updated Sep 10, 2013

Walk through any subway station or busy town center and chances are you are likely to spot an artist performing for a crowd, either passing a hat to collect donations or waiting for cash to be dropped into an open guitar case. Now, imagine if instead of artists, you were to see business professionals doing the same thing, pitching their ideas and hoping they inspire people to toss donations into an open briefcase. Well, with a worldwide audience available on the Internet, they are doing just that, and it's called crowdfunding.

Crowdfunding, as an idea is not new. But, soon, crowdfunding will be more than just passing the hat and asking for donations. Crowdfunding in the United States will soon allow investors to exchange monetary investments for equity stakes in the firms they hope to see flourish. There has been quite a wait for this phenomenon to be legalized (it started in motion with the passage of The JOBS Act in 2012, and specific details for equity crowdfunding are still being hammered out), but while we wait for that to launch, the crowdfunding space itself has continued to evolve.

The delay in the final approval for equity crowdfunding in the US has been frustrating for many US-based firms, but it has allowed the crowdfunding space to gain a strong foothold, gaining momentum from the interest of businesses and investors alike. And, as that happens, people are getting more familiar and more comfortable with the idea -- and in the long-term that should benefit this newly burgeoning market.

Daryl Bryant, Co-founder and CEO of StartupValley explains:

Over the last several years crowdfunding has been picking up tremendous steam. On the rewards and donation based fronts, global crowdfunding saw a growth-rate increase of 72 percent in 2011 and 100 percent in 2012. Sites like Kickstarter and Indiegogo are leading in this space.

Bryant, along with many others who have built online marketplaces for businesses to seek out investors, has been active in working with the industry to get equity crowdfunding launched. With 114 percent growth rates seen in countries with legalized equity crowdfunding, there are high hopes within the Obama Administration that this new market will help propel the US out of a tight fundraising environment.

Crowdfunding online has been around for about as long as PayPal has existed. Since Web 1.0 there have been sites that leverage people within the crowd to support their mission. Wikipedia operates this way in that they leverage people across the world to crowdsource content in an open environment. They also raise assets every year through crowdfunding in order to stay a free and open site.

Most recently and perhaps most successfully Kickstarter and Indiegogo took that concept even further, allowing people to crowdfund their ideas either driven by sheer enthusiasm for a specific project, or in return for something like access to a special token by the business team, or an advanced order on an actual product.

And now we have seen the rise of niche crowdfunding sites that have been launched. For example, Teespring.com is a Y Combinator backed company from Rhode Island that allows you to raise funds using tee shirts of your own design. (Full disclosure that is how we are raising funds right now for our free social network for families).

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There are also social-based crowdfunding sites (as in raising funding for projects that are based on improving the lives of the needy or impoverished).

Bryant's StartupValley itself is focused on a niche market, specifically looking to help tech start-ups and firms generate investments through equity-based crowdfunding (aka crowd investing). In the meantime sites like Teespring.com enjoy the advantage of leveraging a marketplace for fundraising that right now doesn't have competition from companies offering equity stakes. That advantage will likely be short-lived. Bryant draws our attention to two very important upcoming dates in the US equity crowdfunding space:

July 10th : when the SEC will have an Open Meeting to Discuss Title II Rules, which should create the ability to conduct Rule 506 offerings with the elimination of the general solicitation ban for Reg D offerings (see here for more information).

July 11th: when FINRA will have a meeting to consider a proposal to solicit comment via Regulatory Notice on proposed rules and related forms governing funding portals pursuant to Title III of the JOBS Act (see here for more information).

The dynamics of crowdfunding are a fascinating study in the evolution of the markets. Financial markets began in the crowds, moved away from the public and now in one sense are moving back into the hands of the people. "Crowdfund investing will be new to many people but within the first year education will be a key component in this space that will help to inform and educate the crowd on what crowdfund investing is all about," says Bryant.

For better or for worse, it is likely to open up a vast range of possibilities for young companies looking for initial funding, and for established companies looking to grow a proven product into something even greater.