US Crowdfund Act: Good news for micro-investors and entrepreneurs

US Crowdfund Act: Good news for micro-investors and entrepreneurs

Summary: Kickstarter might become a lot more attractive to investors with small amounts of cash. Legislation coming through US Congress is about to change the 1930's law on taking equity in companies in which you invest.

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TOPICS: Banking
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Kickstarter might become a lot more attractive to investors with smaller amounts of cash to spend. Legislation coming through US Congress is about to change the 1930's law on investors taking equity in companies in which they invest.

Credit: Kickstarter

Credit: Kickstarter

You might be a little hesitant to invest your hard earned cash in crowdfunded projects – especially when there seems to be no tangible benefit to the investment.  As an entrepreneur, you might be concerned that your project will not raise enough cash to proceed.  There are several success stories large and small, notably the game Double Fine Adventure which raised over $1.9 million in just over a week.

But you might be one of those investors that want to get some kind of return on your investment.  Currently in the US, you can not get any equity for your cash, but there are other options. You might only want to pre-order something such as the TouchFire keyboard for the iPad

In the UK, small investors can take equity in firms in exchange for cash, however, this currently isn’t possible in the US.  However, the CROWDFUND Act which has just been passed in Senate makes raising capital much easier for small businesses.

The Act, an amendment to the larger Jumpstart Our Business Start-ups (JOBS) Act now goes back to the House of Representatives, and when passed, will allow companies to raise up to $1,000,000 annually through crowdfunding on ‘registered Internet web sites’.

This means that US based start-ups will be able to issue shares in the business in exchange for equity. Companies with just 500 investors, currently have to make information about their funds public. The threshold will be increased to 2,000 investors when the Act is passed.

Jeff Merkley, Oregon’s Senator said:

The CROWDFUND Act will allow that innovation to continue by allowing small investors to pool their resources to fund promising new ventures”. At the same time, this bill protects those investors and sets fair rules of the road. We’ll be creating new opportunities for small businesses and investors alike.

Donation based funding

Sites like Kickstarter are not technically crowdfunding sites.  You offer to give cash, in the form of a donation, either as a gift, in exchange for a free gift or to pre-order the product before it is created. It is an opportunity for entrepreneurs to attract micro funding from supporters who raise money for the project.

The sums don’t need to be huge either.  Small donations can also lead to success. Entrepreneurs like Paul and Zoe Chambers only needed $3,500 to port their iPad and iPhone video game, Islands of Diamonds, to the Android platform.

Kickstarter can get you more investment than you originally planned. The Viper full motion flight simulator is already 401 per cent of its original goal of $2,500 with 14 days to go.

So will the Act, when passed, persuade you to invest in the hot new start up you’ve heard about?  If only the act had been around when Facebook was trying to raise capital.  Would you have invested?

You might also one day, be an investor in the social tool that will topple Facebook.  Imagine how that would feel..

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Topic: Banking

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2 comments
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  • what if the startup goes bankrupt

    can you recover anything? are there any controls of the way the company spends the money?
    The Linux Geek
    • it's not FDIC insured

      But good question about if there are controls on the way the company spends the money, I have not seen any details on this in the many details I have read.
      dlrecords