Crowdfunding Could Upend Hyperlocal — Here’s What You Need to Know

The new JOBS Act has opened the door for crowdfunding, a boon to hyperlocals seeking new ways to launch their businesses. But it may take until early next year before the Securities and Exchange Commission establishes rules that will govern the process. What to do in the meantime? Keep an eye on what regulators may churn up, see what major crowdfunding sites plan to offer, and explore whether hyperlocals need their own niche investment portal.

On April 5, 2012, President Obama signed into law the Jumpstart Our Businesses and Startups Act, calling it a “game changer.” The law authorizes the use of “crowdfunding,” in which up to $1 million worth of unregistered stock can be sold every 12 months to an unlimited number of mom-and-pop investors.

Anyone, not just richer individuals, will soon be able to make small investments online. Under the law, how much you can invest will depend on your worth. If your net worth is less than $100,000, the investment cannot be more than $2,000 or 5 percent of a your annual income or net worth. If your net worth is equal to or more than $100,000, the investment cannot be more than 10 percent of your annual income or net worth, with a maximum investment of $100,000.

A key change is that the investment offering can be made through a broker or an Internet “funding portal” that will match up investors or lenders with companies. The “funding portal” is a new animal under the JOBS Act. It must register with the SEC. The intermediaries will do some vetting of companies, such as background checks on officers and directors. The SEC must decide this year whether it will impose strict or more relaxed standards on funding portals compared to other brokers. The rules will determine the ease in which business and investors can engage in crowdfunding.

Organizations have emerged over the past month to convince the SEC that “funding portals” should operate under their own rules to encourage crowdfunding. In late March 2012, a team of advisors, regulator experts, attorneys and venture capitalists organized the National Crowdfunding Association (NLCFA). The NLCFA seeks to become the leading trade organization for crowdfunding portals, VC firms, software vendors and other parties. One of its immediate goals is to avoid “hyper-regulation” of crowdfunding, David Marlett, Executive Director of the NLCFA, told Street Fight.

“The funding portals should be governed by their own rules,” Marlett said. “We anticipate the rules will be different. They don’t have to be licensed brokers, and we don’t want them to be. Let’s not try to do a one-size-fits-all approach to brokers.”

Marlett suggests that regulations focus on transparency and disclosure, which should include a uniform and adequate process for reporting. “The best cleanser is putting everything in the sun,” he said.

On April 20, 2012, the NLCFA expressed support for the Crowdfunding Accreditation for Platform Standards (CAPS), which establishes best practices for operating crowdfunding portals globally. A team of 15 members of the industry serve on the CAPS council to create consistent standards to promote the adoption of best practices. The standards are updated at least quarterly, according to Dr. Kevin Berg Grell, CAPS Program Director. “The standards are dynamic, and our goal is to push the standards higher and higher,” Dr. Grell told Street Fight. CAPS recently accredited crowdfunding sites such as CrowdFunder, RockThePost, SoMoLend and CrowdCube. Dr. Berg said it was too early to speculate on what role CAPS may play in a self-regulatory program.

Thirteen members of the crowdfunding industry, including RocketHub, SoMoLend, CAPS and Crowdfunder, created the Crowdfund Intermediary Regulatory Association (“CFIRA”) to extol some industry influence on the SEC and potentially evolve as an industry self-regulatory organization. Similar to the NLCFA, the CFIRA plans to work with the industry and the SEC to agree on a set of principles and robust industry regulations The success of these new groups may influence the ease or difficulty of enabling small businesses and small investors to invest online.

Until the gates finally open for crowdfunding investments, crowdfunding sites will be jockeying for position in the new marketplace. CircleUp launched a hybrid crowdfunding platform where it vets consumer product and retail startups seeking investments and posts them on a portal that only is accessible to accredited investors. CircleUp sees potential for opening its platform to the public. “With the right protections and incentives, I am confident the long-term promise of crowdfunding will be realized,” Ryan Caldbeck, Founder and CEO of CircleUp, posted in a blog.

Also positioning itself to take advantage of this new wave of crowdfunding is SoMoLend, of Cincinnati, Ohio. The site currently coordinates peer-to-peer lending, through a partner arrangement with Key Bank. However, the site indicates it wants to break into the crowdfunding portal opportunities. “With access to all this upcoming technology and the JOBS Act passed, we are creating a network of those individuals that need a loan for their business and others who want to invest,” SoMoLend posted in a statement online.

Rose Levy, spokeswoman for IndieGoGo.com told Street Fight: “With the economic growth lagging behind historical patterns, the American economy sorely needs the boost that crowdfunding can provide by making small investments in startups easily accessible to all Americans through online portals like Indiegogo.com.”

Should hyperlocals seek their own niche funding portal? Marlett told Street Fight that portals may be created by community development boards, whose crowdfunding strategies may help a community business gain funding through the portal that may encourage supplemental funding by community banks.

Darryl Burma of StartingTrends suggested in a blog post that niche portals could make it easier to bring together niche businesses with niche investors: “Probably the most obvious advantage is having a central fundraising hub for a highly targeted group of people. This makes it easier for investors to find the type of companies, people or ideas they want to invest in,” Burma wrote. “For entrepreneurs it helps increase their odds of having their startup ventures fully funded.” Burma cited Springster.com as an example, in which the site raises money for veterans and franchises.

Brian Dengler is an attorney with Vorys Legal Counsel and journalist who covers legal issues in eMedia. He is a former vice-president of AOL, Inc., a former newspaperman, and an EMMY-winning TV journalist. He teaches new media issues as an adjunct at Kent State University and formerly at Otterbein University.

Image courtesy of Flickr user aresauburn.

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