After more than three years of delay, the SEC has finally passed rules making investment crowdfunding a reality. Considering it’s been so long since Congress passed the legislation authorizing investment crowdfunding, it’s easy to forget how significant of an achievement today’s news represents. For the first time, entrepreneurs can raise capital from everyday investors over the Internet, opening up a vast new pool of funding for startups throughout the country. For the 20% of entrepreneurs who have identified a lack of adequate capital as one of the three biggest challenges they face, the SEC’s passage of final rules couldn’t have come at a better time.
Grand pronouncements about investment crowdfunding’s potential shouldn’t be dismissed as mere hyperbole. Simply put, investment crowdfunding has the potential to revolutionize startup financing and enable new groups of entrepreneurs to participate in the startup ecosystem. The success of rewards-based crowdfunding platforms like Kickstarter and Indiegogo suggests that investment crowdfunding will make it far easier for startups outside of traditional tech hubs in New York and California to raise funds. Consider this: the average venture capital investor resides within 70 miles of his or her portfolio companies, while the average crowdfunding backer resides, on average, 3,000 miles away from the companies they support. With traditional venture funding concentrated on the coasts (75% of all VC funds go to companies based in California, New York, or Massachusetts), investment crowdfunding will enable more capital to flow to emerging startup hubs throughout the country. Similarly, investment crowdfunding has the potential to help fix the tech sector’s troubling lack of diversity. While women entrepreneurs have been excluded from traditional venture funding (female-owned companies are 18.7 percent less likely to raise a successful venture round than male peers), they have found far greater success through rewards-based crowdfunding platforms.
While investment crowdfunding has great promise, much work remains to be done for crowdfunding to reach its full potential. As outlined more fully in the white paper we released earlier this month, a few key changes to the investment crowdfunding regime could go a long way towards making crowdfunding a viable option for smaller companies and the investors supporting them. For example, the current rules impose significant disclosure obligations on issuing companies that may increase the cost of raising crowdfunded capital to a point where all but the riskiest companies will turn to other forms of financing for low-volume raises. As demonstrated by the success of the investment crowdfunding market that developed in the U.K. as the U.S. market waited on the SEC to pass final rules, these additional requirements are unnecessary for investor protection and may unduly inhibit the growth of the crowdfunding sector. Though the SEC’s final rules improve on the disclosure rules in earlier drafts, there’s still more work to be done.
Hopefully, today’s announcement is just the first step towards perfecting the U.S. investment crowdfunding market. For cash-starved entrepreneurs and everyday investors eager to join in the innovation economy, today is a seminal moment. For advocates and policymakers working to ensure that investment crowdfunding fulfills the ultimate promise of the JOBS Act, today is just the beginning. We look forward to working with Congress and the SEC in the future on this important issue.
