Kickstarter, a website not widely known as much more than a neat little distraction where the generous can donate a bit of money to interesting projects, may soon completely change the realm of small business investment. If you’ve never used this type of service, you essentially browse through the various projects that looking for a bit of start-up cash, donate however much you want to them and, in return, the people in charge of the project will give you some sort of thank you gift.
While an interesting model, few actual businesses have been able to start using crowd-funding sites like Kickstarter. The capital just isn’t there to start a business in earnest.
However, that doesn’t mean the interest doesn’t exist. A potential new law is winding its way through congress, and it could have businesses relying entirely on crowdfunding sites for startup capital. In the House, it is called the Entrepreneur Access to Capital Act (H.R. 2930)and has already passed. In the Senate, it goes by the Democratizing Access to Capital Act (S.1791) and is currently waiting in committee.
Currently, it is very difficult for business owners to raise capital from anyone deemed a non-accredited investor (NAI) – basically anyone who makes less than $200,000/year or manages less than $1 Million in assets. Funding can only be sourced from up to thirty-five NAI’s and each NAI can only invest $100. Because of the difficulty of raising money from NAI’s, and the reputation they have for getting a bit angry when their investments don’t quite work out, most start-ups are advised to look for alternative sources of funding.
But the built in anonymity associated with internet, and guaranteed by intermediary websites like Kickstarter, can help ensure that NAI’s interested in heavier investment won’t be able to badger a business they invested in if that business wasn’t able to make it. The laws also have built in protections for investors, with the Senate’s version capping investment at $1,000/yr and the House’s placing the cap at 10% of the investor’s income up to $10,000.
Even if the Senate’s version wins out and the cap is only raised $900, the removal of the limit on total number of investors opens the possibility of relying entirely on crowdfunding for start-up capital. Anyone who believes in a business has the chance to invest a bit of money in it, and make a bit of money in return. Small businesses won’t have to kowtow to large venture capital groups or banks either – all it takes is a good idea and a bit of luck.
Now that also means that these intermediary sites will have to adhere to the strict guidelines of the US Securities and Exchange Commission if they wish to be involved in crowdfunding efforts, which does create a barrier of entry for any group that doesn’t have the capital to invest in getting up to code. However, there is a bit of money to be made acting as an intermediary, so I wouldn’t count on the scene being dominated by the old standbys of Kickstarter, Kiva, and AngelList.
Either way, these attempts to change the well-dated restrictions on NAI’s will significantly impact small business investment. There is a lot to be gained if these acts pass, and I am extremely excited to see a new avenue of funding open for fledgling entrepreneurs.
But for now, all we can do is watch the developments as they unfold and give our predictions.