Crowdsourcing Funding for Startups

A self-publisher of a web-comic asked for $57,000 on Kickstarter to reprint a series of comic strips and raised ten times as much from more than 7,000 backers – with two weeks to go before the funding drive ended. Meanwhile, a new fashion company took in over $64,000 from nearly 800 funders to launch their new line of multi-functional fabrics – tripling the amount they initially asked for. Clearly, the age of crowdsourced funding has arrived; it’s time Canadian entrepreneurs started examining the possibilities. Actually, they are.

Crowdfunding for new companies and established ventures

Crowdfunding, otherwise known as crowdsourcing, as an alternative source for funding companies is getting more attention these days, since the US Senate has got on board in November with the “Entrepreneur Access to Capital Act”.

According to Forbes Magazine, the legislation allows companies to bypass dated regulations to take advantage of the flourishing online fundraising economy. Specifically:

The bill provides a crowd funding exemption from Securities and Exchange Commission registration of securities offerings, with certain limitations:

* A $10,000 limit per investor (or 10 percent of annual income, whichever is less).

* A cap on the amount a company can raise of $1 million per offering (and up to $2 million if audited financial statements are provided).

* No limit on the number of accredited or unaccredited investors.

These websites allow investors to fund “projects” as opposed to open-ended businesses. That said, the possibilities for expanding the model to startup funding are obvious. Imagine a for-profit startup that’s been turned away by banks and neglected by angel investors, pitching the masses on their new eco-friendly product or extremely useful high-tech gadget and using this to launch a world-beating corporation. It’s going to happen.

Kickstarter has got a lot of media attention lately and it seems competitors facilitating crowdsourced funding, like Rockethub, are also becoming available outside the USA for Canadians and others.

The Canadian government has been slow to move, but seems to be picking up steam. The Canadian Securities Administrators (CSA) today announced that they are reviewing the $150,000 minimum amount prospectus exemption, which could open the door for crowdfunding.

Clearly, crowdfunding has obvious benefits for the entrepreneur and the investor. But there are pitfalls relating to the higher level of risk relating to the development stage of intended investment targets that are normally untested, nascent start-ups.

However, as great these risks might be, I believe that the invisible hand of economics provides direction on the issue of crowdfunding. Adam Smith (1776) wrote about the invisible hand of economics and postulated that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. Furthermore, any government intervention in the economy isn’t needed because the invisible hand is the best guide for the economy. Both sides of the coin wins the flip.

Thus, people wishing to engage in crowdfunding will vote with their wallets, in the most rational way, to further their own economic ends. We have only to look at the stock market today to drive home this point.

Certainly, there has to be some industry regulations and governance to ensure the efficacy of such practice; but the fundamental reason for crowdfunding is to open up the ability for small investors to get into the game. It should allow these individuals an opportunity to make a difference and potentially reap the benefits of dollars accumulating in their bank accounts. This is the basis of our free enterprise economy and if this machine is working well – it will deliver the wealth and means to those that can help make a difference on both sides of the investment coin.

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