Hyperlocal Crowdfunding May Become a Reality — Here’s How to Prepare

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moneyDespite a recently missed deadline that would have given hyperlocal businesses an ability to raise capital through crowdfunding, backers of the Jumpstart Our Business Startups Act (JOBS Act) are optimistic that equity crowdfunding could become a reality by the end of the year. Crowdfunding could be a $6.2 billion market in the U.S. within the next year, according to Sherwood Neiss, who promoted the crowdfunding provisions before Congress and serves as a principal with Crowdfund Capital Advisors.

Crowdfunding as a concept is not exactly new to hyperlocal publishers. A number of journalism groups have used crowdfunding to underwrite projects in the past few years. For example, a Knight Foundation grant helped create Spot.us, a site that allows the public to crowdfund “community powered reporting.” American Public Media acquired Spot.us in 2011. But until now crowdfunding has been limited to donation-based funding or rewards based funding on sites such as Spot.us or Kickstarter. The JOBS Act, which was signed into law by President Obama last April, takes crowdfunding to the next level, enabling hyperlocal companies and entrepreneurs to raise up to $ 1 million per year from small investors through online crowdfund portals. Rather than fund a mere project for a donation, hyperlocals will be able to raise capital to operate their venture.

But there’s a hold-up. Congress delegated the responsibility to create regulations governing equity crowdfunding to the Securities and Exchange Commission. It also established a due date of December 31, 2012. The SEC’s deadline has come and gone, and recent turnovers at the SEC, including the resignation of Mary Schapiro as its chair, has frustrated the the timely launch of crowdfunding regulations. Several weeks ago, President Obama nominated former federal prosecutor Mary Jo White to serve as the SEC’s new chair, and crowdfunding backers are optimistic that the SEC will have regulations ready for public comment later this year.

“I believe that we can still expect to see the proposed rules to be released in the first quarter 2013 with the public comment period running through the second quarter 2013,” said Kim Wales, a board member of the Crowdfund Intermediary Regulatory Advocates (CFIRA) and principal of Wales Capital. “This will pave the way for final rules to be released at the end of the second quarter.”

Freeman White, an executive board member of CFIRA and CEO and co-founder of Launcht, suggests that the SEC culd still put  forward a draft set of rules for public comment even before White is confirmed as the new SEC chair. “We hope that the SEC makes use of the progress it has made over the past nine months and puts forward proposed rules as soon as possible,” White said. “Anything that can be done to mitigate the risk of delays posed by the imminent leadership change at the SEC would be good for everyone.”

“Small businesses are the driving force of the economy and create upwards of 80% of all new jobs and right now, the U.S. unemployment rate is 7.8%,” Wales added. “That is a problem.”

What can hyperlocal ventures do right now to get ready for equity crowdfunding? Ruth Hedges, Founder and CEO of CrowdfundingRoadMap suggests the following:

  • Establish a business entity or corporation that can issue equity.
  • Develop a detailed business plan.
  • Develop a polished presentation that is honest and complete, and will appeal to crowdfund investors.
  • Create a financial statement that will comply with the JOBS Act and regulations.
  • Build business networks.

Hedges adds that most successful crowdfunding projects raise up to 30% of their funds from their own network contacts.

brian denglerBrian Dengler is an attorney and journalist who covers legal and business issues in media and information technology law. He is a former vice president of AOL, a former newspaperman, and an Emmy-winning TV journalist. He teaches media management, media law, and journalism ethics at Kent State University. He recently was honored by being included among the Best Lawyers in America for 2013 for information technology.