As a preface to this piece, let me say I am a big supporter of equity crowdfunding. It’s ridiculous that we, as non-accredited investors, have not been able to invest in startups until now. Due to the accredited investor laws, I personally missed an opportunity to invest $25k in my friend’s startup in 2006, and it’d be worth $750k today.
But as written, the (still not finalized) JOBS act is fundamentally flawed. The $1m/year limit on fundraising cripples it from the start. In the US, the philanthropic side of the industry raised $3b in 2012, and it’s only 3 years old. Indiegogo and Kickstarter are doing $10m deals, regularly. Equity crowdfunding could, and should be much bigger. As big as the NYSE if we let it. Cheaper, more equal, and no high frequency trading (hopefully).
Explosive growth is inevitable in the space. But if we want it to happen efficiently, and soon, the government needs to give it space. When deals sell out in under 5 minutes, people are not going to be happy. When entrepreneurs pick Kickstarter over Crowdfunder, the economy is damaged. Distributing equity to small investors is a fundamental element of the economic engine.
It rewards smart business, and smart investing, and encourages more of both, which has a compounding growth effect on the economy. And every day we delay, we are compounding our growth losses. You want real growth? Raise the limit to $100m. Wall St’s monopoly would fade away, and small business would thrive.
If you’re not convinced that ECF legislation is flawed, consider this example. Let’s say Google executive Matt Cutts leaves the company to found a competing search engine. God knows why, but he decides to go the equity route. That’s despite the fact that instead of t-shirts or beta access, he’s giving away part of his business. And he’ll only be able to raise $1m, compared to the $10+ he would likely raise on Kickstarter.
His fundraising hits the JOBS Act $1m limit in ~3m. He’s ok with that, but probably regrets not going the philanthropic CF route. He could have given away 1/10th the capital and raised 10x as much.
Now, I’ve met Matt, and he’s scary smart. Ran into him at the Wynn during Pubcon 2007 and chatted for about two hours. He was sober, I was tipsy, and he was trying to find out what SEOs are doing to game Google these days (I do web marketing by day). He joined GOOG in 2000 ( and is the head of search quality. PhD from UNC (my hometown, go Heels).
And I’m pretty sure he, and most intelligent people in his (hypothetical) position would pick Kickstarter over an equity crowdfunding option. Why wouldn’t he? Issue equity shares, or give away shirts and beta access?
$50m. That’s the minimum limit we need. Ideally, there should be none. I realize that’s not going to happen, so am pushing for a nice, round, bureaucratic number that politicians will understand.