Start-Up Finance: The Roar of the Crowdfunding

Abstract

Both equity and non-equity crowdfunding has proven to be a productive method of capital formation for start-ups. The equity crowdfunding provisions of The Jumpstart Our Business Startups Act (the “JOBS” Act) offer perhaps the most promising development to facilitate capital formation by Entrepreneurs since the Great Depression. The JOBS Act became law during April 2012, and established a regulatory foundation enabling startups and small businesses to access new capital using crowdfunding. Title III of the JOBS Act, known by the acronym THE “CROWDFUND” ACT (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act) creates an exception under which the U.S. securities laws are amended to allow equity crowdfunding campaigns to be easily employed to raise capital through the offer and sale of securities to the public. These crowdfunding-related provisions “include investment restrictions and new compliance requirements for both small businesses seeking to obtain funds through crowdfunding and the portals that will connect entrepreneurs and investors.” Through this Act, Congress intended to lower regulatory barriers in order to give small companies and startups a larger pool of investors from which to raise capital.

Crowdfunding is an important contemporary and rich topic that has implications in entrepreneurship, finance, business law, marketing ̶ and has application across multiple industries and categories of human endeavor. This brief article presents: a history of crowdfunding; illustrates success by entrepreneurs in cinema, music, technology, and video games; discusses the development and impact of KickStarter, Indiegogo, and other crowdfunding platforms; explores the tension between U.S. securities laws and the potential for equity crowdfunding; looks at Congressional intent and what, if anything, needs to change at this point to enable equity crowdfunding to achieve and optimize its intended purpose, now that SEC proposed rules have been issued. This article hopefully helps to fill the gap in the literature regarding the effectiveness of the JOBS Act and will prove of benefit to both practitioners and scholars.

Keywords: Capital Formation, Crowdfunding, Entrepreneurial Finance, Family and Friends, Indiegogo, Internet, JOBS Act, Kickstarter, Securities Regulation, Social Networks, Venture

JEL Classification: G21, G24, G32, L11, L13, L15, L21, R12, Z11