SmallBiz Vote

Waiting for the equity-based crowdfunding story to start

Had you asked any entrepreneurship observers six months ago to predict the top small business stories of 2013, equity-based crowdfunding would surely have been on the list. Now, many fear the story might be delayed another year, or worse, end before it ever started.

The new practice that would allow unaccredited investors to take stakes in small startups through online portals was made legal by the JOBS Act last April. Not to be confused with donation-based crowdfunding—which entrepreneurs and inventors such as Jonathan Lansey have been using successfully for several years—equity-based crowdfunding would allow funders to reap a financial return on investments or loans that help startup businesses get off the ground. Pioneers of a new equity and debt-based crowdfunding sector pounced on the opportunity and prepared for the law to take effect in 2013.

But to their disappointment, the Securities and Exchange Commission has failed to issue the rules that were mandated by the Act to open the gates for crowdfunding this month. The missed deadline is no surprise. We reported here at SmallBizVote on the many open questions that remained for rulemakers as late as mid-November. And last month the New York Times reported that the delay can in part be attributed to the departure of SEC chairwoman Mary Schapiro.

Still, some crowdfunding pioneers and investors remain optimistic. Venture capitalist Whitney Johnson told the Wall Street Journal last week that “beginning in 2013, equity and debt crowdfunding will further fill the early-stage funding void of $0-$250,000.” She predicted that crowdfunding would, over time, “change the game not only for early-stage but also late-stage investing.”

As Amy Cortese, author of the book Locavesting: The Revolution in Local Investing and How to Profit From It, reports in the New York Times today:

"Despite the uncertainty, the outlines of a new industry are emerging as a few crowdfunding start-ups have found ways to raise money within current rules. They include companies like CircleUp and SoMoLend, which lends money to small, Main Street-type businesses that typically wouldn’t interest private investors. By themselves, of course, a few start-ups can’t completely democratize finance. But they begin to illuminate what the future of crowdfunding could look like, as the debate continues over a vast widening of the private investor pool."

We wrote last year about SoMoLend’s debt-financing model, and, separately, about how a company called Creative Invites & Events, has already benefited from it. These stories indicate that some innovative new types of fundraising might be available to small businesses this year whether the SEC gets rules in place for equity-based crowdfunding to start this year or not.

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