Crowdfunding Moves From Fun To Profit
Last year a neighbor of mine named Maria Moore Riggs used Kickstarter to launch a doughnut shop near my house called Revolution Doughnuts. The revolution is in the ingredients, like artisanal bacon (yes, bacon), and the pricing up to $2.50 per pastry.
She got over $12,000 in cash from 333 backers and opened late last year. The lines each weekend are out the door and up the block. During the week it's a great neighborhood hang-out. Plus, of course, there's The bacon. On a yeast doughnut. Topped with caramel. Yummy!
"It's a way for people to pre-pay for goods and services," she explained to me over her latest creation, a doughnut-croissant cross called "crodough" (think of it as Atlanta's cronut). Subscribers got doughnuts and even a kids' birthday party, at the store, for their money.
"It's also a way for people to build their community," she added. Judging by the lines of strollers up and down the sidewalk on Saturdays, I'd say right on both counts.
The point is, crowdfunding works. But until now, you could only pay supporters back in things like doughnuts and satisfaction.
The new rules limit how much can be raised ($1 million per year), limit how much individual investors can put in ($2,000 or 5% of net worth if your net worth is under $100,000, 10% of income or net worth if it's over that) and impose some disclosure requirements, including audited financial statements for deals over $500,000.
The rules also impose requirements on the companies handling offers. They must be a broker-dealer or an SEC-regulated "funding portal," for instance. Portals are also only portals they can't advertise or recommend any specific deal. Companies can, however, advertise the fact of their offers, directing investors to the portals. The Financial Industry Regulatory Authority will regulate the portals.
Companies raising capital through crowdfunding will have to provide basic information to the SEC, including audited financial statements for deals over $500,000, statements from accountants for deals from $100,000 to $500,000 and tax returns on smaller deals.
It's not as formal as the rules for conventional offerings, because the funding and investment limits are lower, but some start-up advocates call the new rules onorous. Others call the costs of compliance too high for profit, and still others say there's not enough protection for investors.
But the appetite for these deals is enormous. Massolution, a research firm covering the industry which runs the news site crowdsourcing.org, recently estimated the size of the industry in 2012 at $2.67 billion, predicting $5.1 billion could be raised this year as the industry moves toward the actual raising of capital.