Sometimes it pays to join the crowd.
Entrepreneurs have used crowdfunding for years now to raise money for documentaries, craft breweries and artisanal mayonnaise when they could not or would not otherwise secure funds from a bank. Now, the investors want in – and regulators are keeping a careful eye on this new investment vehicle.
Crowdfunding is simple: You have a business idea, but no money, so you appeal to the “crowd,” typically friends and family, for funds.
Allison Grappone, the founder and CEO of Nearby Registry, recently launched a crowdfunding campaign to help expand her business, a website that provides online storefronts for small businesses, so people making gift registries or wish lists can support local businesses instead of big box stores.
The Manchester, N.H.-based company is looking to branch out into Boston and other cities, and if they hit their $9,500 goal, Grappone said they’ll use those funds to create an ambassador tool kit for interested communities.
For Grappone and other crowdfunded entrepreneurs, the model is just as much about social capital as it is about money.
Grappone, who has been in talks with angel investment groups, said, “We wanted to prove to our funders that communities want this and that they’ve proved it by giving us close to $10,000.”
Crowdfunding As A Trend
Advocates say crowdfunding won’t “crowd out” traditional lending from brick-and-mortar banks, so much as complement it.
“I think, frankly, it’s a business development opportunity for banks,” said Jason Best, co-founder of Crowdfund Capital Advisors.
In the first place, entrepreneurs who raise money crowdfunding will need a place to put that money, most likely a bank or credit union. That in turn creates an opportunity for those financial institutions to build new relationships with budding entrepreneurs.
“It creates an on-ramp to become bankable customers,” he said.
“For all of the innovations happening in the financial space right now, I think the fear is that things coming out new today will replace the old. I see it as augmenting and supporting what we have today. I don’t think the existing lending industry will be replaced by crowdfunding,” Financial Futurist Heather Schlegel said.
Schlegel has worked in Silicon Valley’s technology sector, in research and in filmmaking. She is presently in the pre-production stages of “The Future of Money,” a six-part television series which has its roots in her graduate research.
“I knew technology was disrupting a lot of industries,” she said. “I saw this happening with music sharing and the entertainment industry, with blogging and mainstream journalism, and I could see the same thing about to happen to the financial industry.”
Naturally, Schlegel crowdfunded her series – part of it, anyway – raising $37,000 on Kickstarter over 40 days.
Regulation
Crowdfunding, naturally, has drawn the attention of legislators and regulators. Best, along with his co-founder Sherwood Neiss, crafted the regulatory framework that later became the crowdfunding language in the JOBS Act President Obama signed into law in April 2012.
And Secretary of the Commonwealth William Galvin announced plans earlier this year to form the Internet Crowdfunding and Offerings Watch Department, or I-CROWD, a new unit in his office that will monitor crowdfunding websites.
Crowdfund investing is a bit different than what Schlegel and Grappone are doing, Best said.
“Crowdfund investing is what we legalized. It’s either equity- or debt-based,” he said. “Until the JOBS Act, you were not able to raise money publicly and you were not able to do it from people you didn’t have a pre-existing relationship with, or through social media.”
Right now, that bill is making its way through the Securities and Exchange Commission’s regulatory process, so while crowdfund investing is now legal, it’s not yet live. Best expects to be able to start doing some crowdfund investing next summer, and in the meantime, he’s combating misconceptions and fears about crowdfund investing.
First, he said, the crowdfund investing regulations include a background check required of entrepreneurs seeking to raise capital, a substantial investor protection.
Second, the “crowd” is a bit of a misnomer, as a typical crowdfund campaign will attract less than 100 investors to one company, he said. That’s been the case in Australia and the U.K., anyway, which have had crowdfund investing for several years now. And investors typically don’t throw away their life savings on a crowdfund investment, Best added.
Like Best, Schlegel takes an optimistic view toward crowdfunding and its place in the future of finance.
“These changes that are happening in the financial industry, there’s no going back,” she said. “We really need to have a conscious awareness and accept that these changes are coming forth and explore positive ways these changes can enhance existing business models and not run away from them.”
Email: lalix@thewarrengroup.com
