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31 March 2013

Green light for crowdfunding

Should sufficient support to start-ups be provided alongside crowdfunded equity backing, it will lead to more firms, more jobs, and more innovation all round.

Author: Gregg Bayes-Brown, editor

Music, films, journalism and, most recently, higher education have all felt the disruptive power of the internet over the past decade. Now, venture capital (VC) looks to be getting its turn, with potentially massive implications for university start-ups currently struggling to find backing.

FundersClub, an electronic commerce start-up which allows any accredited investor to invest in startups in exchange for equity, was considered by some to be operating in a legal grey area as it wasn’t a registered broker-dealer. FundersClub maintained that its online venture platform broke no laws as it never directly handled invested money, which is kept in separate accounts for each startup on the site.

Now, the US regulator, Securities and Exchange Commission (SEC), has agreed with FundersClub, and this past week issued a “no-action” letter, which will allow the platform to continue trading.

Alex Mittal, FundersClub chief executive, said: “The letter is a win for accredited investors, start-ups, and the VC industry, and strong validation of the business model of FundersClub – to bring the transformational impact of the Internet to venture capital.

“It allows FundersClub to do something online that historically venture capital advisers have only done offline. Via the no-action letter, the SEC has officially recognized the legitimacy of online VC, a field we’ve pioneered and are leading with FundersClub.

“For accredited investors, they are now allowed much more flexibility in how they invest in venture funds that support start-up companies. For start-ups, they are gaining easier access to an important source of capital and value-add.”

The platform, which facilitates investments of anywhere between $1,000 to $250,000 from accredited individuals, has so far invested nearly $4m into start-ups since launching last year, and is spearheading the drive to online venture capital. A graduate of the Y-Combinator accelerator, the firm has raised $7m in its own venture backing to drive its platform from investors such as Intel Capital and Spark Capital.

However, it’s not alone, and the online venture space is about to get a lot more crowded. While crowdfunding isn’t a new phenomenon, KickStarter and others like it have been operating for some time, equity-based crowdfunding for investors looking to get a monetary return on investment rather than a material product has been tied up with regulation. This has limited most crowdfunding platforms to only offering backing for creative projects or inventions, and less so businesses.

This looks to change later this year as the Jumpstart Our Business Startups (Jobs) Act will come into play in the US. With it, new legislation that will make it legal for entrepreneurs to raise early-stage equity-based financing that can be sourced from anyone, not just accredited investors.

Ahead of the JOBS Act coming into full-force, many new start-ups are appearing and looking to corner some of the new venture-crowdfunding market, which will see individuals invest in new firms for as little as $100.

One such start-up, Wefunder, raised $520,000 in November last year (through its own platform) to help unaccredited investors put money into start-ups when it gets the green light over the coming months, and is already working with Y-Combinator start-ups.

Another, CrowdIt, just moved into Missouri State University’s eFactory Business Incubator, with the aim of becoming an “incubator within an incubator” to provide assistance to start-ups backed by funds from CrowdIt’s investors.

Some limitations still exist in the Jobs Act, such as a tiered cap on what a person can invest based on income and a ban on the crowdfunding of investment funds, but these are largely there to protect investors. However, the bill will open the door to multiple venture crowdfunding platforms to be set up, which in turn will allow start-ups, both coming from universities and those set up independently, to find equity from multiple sources to get their businesses going.

What it could mean for university spin-outs cannot be understated. Many universities lack the support to build a sizeable investment fund of their own, and must therefore work through conventional models to raise funding. With venture-crowdfunding, students and alumni looking for support could circumnavigate these obstacles, and even turn to their own student and academic communities to raise investment.

As it was with the MP3 and as it currently is with Massive Open Online Courses, the direct impact of venture-crowdfunding remains to be seen. Ultimately though, should sufficient support to start-ups be provided alongside crowdfunded equity backing, it will lead to more firms, more jobs, and more innovation all round.

Copyright Mawsonia Limited 2010. Please don´t cut articles from www.globaluniversityventuring.com or the PDF and redistribute by email or post to the web without written permission.

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