In 2012, lawmakers passed the JOBS Act: Legislation that industry leaders are saying could revolutionize the way startups get funded.

Grant Heimer, LEA External Relations Director

Crowdfunding. It’s a word you may or may not have heard before, but industry leaders claim it will be a household term by the end of 2013. As the name implies, it refers to a crowd that collectively funds something. Its most popular use, starting companies, was discussed at length during the CrowdfundTX conference in Austin on January 8th.

More specifically, crowdfunding is the act of raising capital from a large, diverse group of people online who don’t necessarily, but possibly, receive something in return for their contribution to a given project. In particular, I’m referring to a model seen often on the crowdfunding platform to incentivize contributors, the more money a donor gives to a project, the more the donor will receive in return – often products manufactured by the business itself. No tangible reward is actually required in return, but it certainly helps bring in capital.

Before we go further, I should make clear there are different forms of crowdfunding: a company can actually offer equity in return for a person’s investment, and there are crowdfunding platforms that operate in the way a bank would, essentially raising debt for a company. The form that’s most popular and definitely most relevant to the college startup crowd is the donation-based platform.

For a successful example of crowdfunding, take the company Cinetics, started by UT and MIT alumnus Justin Jensen. Justin created a contraption with wheels and a tripod connection that allows for smooth video shots, which could be manufactured and sold inexpensively when compared to other filming equipment. He wanted to raise $20,000 to get the company up and running, and offered different rewards in the form of products for contributors. Pledge $10, get a lens cloth. Pledge $150, and get a set of the “CineSkates.” Rewards continue for contributions up to the “$325 or more” category. Long story short, he’s raised over $480K since the campaign began. Yes, a lot of what was raised had to cover the rewards for investors, but that’s still a lot of money that he only has to pay 5% commission on (this number varies by platform) to receive from Kickstarter. Banks would want a larger fee than this, and venture capitalists would want a large stake in his company. This way, he’s created a product that the public wants, he’s raised enough capital to make the company sustainable, and he doesn’t have to give away any ownership in his company. You can see the beauty in this model; it’s caught on very quickly in the last few years, and the SEC is catching up as fast as possible to allow for its advancement.

The conference held here in Austin was focused on the effect the JOBS (Jumpstart Our Business Startups) Act will have on startups and investors here in Texas. The JOBS Act was signed into law in April 2012, but unfortunately most of the law will not become effective until later this year as a result of the massive changes it brings with it- some provisions that have been in place since the 1930s are going to be revoked when the SEC gets a chance to implement the new regulations. In the Jobs Act Summary provided to conference attendees, the purpose is “to expand and ease methods of capital raising by, and relax the regulatory burden on, smaller companies.”

There’s a lot that goes into this. And although we were fortunate to be in the presence of some of the most involved lawyers and investors that have been working alongside the SEC, it would have been impossible for them to discuss all of the effects the JOBS Act will have on startups, investors, and small businesses. And that’s not even taking into account that the final “interpretive and adopting regulations” haven’t been adopted by the SEC yet. Unfortunately, many of the questions directed at the panel of lawyers were met with answers that, in effect, said “we won’t know until the SEC finalizes the laws.”

The speakers themselves said the rules can be complex and highly suggested speaking to lawyers before taking part in crowdfunding once the new rules are enacted. So let’s go over the basics they outlined so you can better understand how the JOBS Act will advance the industry (Comments in parentheses; Titles 2 and 3 are the most relevant pieces of legislation):

Title # and Name Summary Implementation
Title 1
Reopening American capital markets to emerging growth companies 




Establishes the Emerging Growth Company IPO “on-ramp.” (Allows a company up to 5 years after IPO to be in total compliance with certain financial disclosures, if the company made under $1B in most recent year). 


Effective immediately. 





Title 2
Access to capital for job creators 





Lifts the ban on general solicitation and advertising for securities. (But inbound investors will be screened & regulated. May require docs like tax filings. And as an investor, be sure the company is properly registered. Still, this is definitely a game-changer. You couldn’t ever solicit investors for your company before.)



Panelists were split on the expected implementation- some say this quarter, some say next quarter. 





Title 3




Registration exemption for limited-size offerings to be sold in small amounts to a large number of investors (file this under “relax the regulatory burden on smaller companies.”)



Again, panelists were split, but expect it to be in place by Fall 2013. 




Title 4
Small company capital formation 



Increases the amount of capital raised under Regulation A (a series of SEC rules) from $5 million to $50 million in a 12-mo. period.



No deadline for enactment. 



Title 5
Private company flexibility and growth 



Raises threshold for mandatory registration from 500 to 2,000 shareholders of record as long as there are LESS THAN 500 “non-accredited” (basically, net worth < $1 million) investors.



Effective immediately. 




Title 6
Capital Expansion 




Raises threshold for mandatory registration from 500 to 2,000 shareholders of record and raises thresholds for a non-listed bank or bank holding company to terminate its registration from 300 to 1,200 shareholders of record.



Rules required within a year of JOBS Act (but given the delay of everything else, I’m not expecting that). 



The idea is to give small businesses more funding, faster and with less hassle, which in theory will lead to more jobs (JOBS Act… get it? Capitol Hill doesn’t get enough credit sometimes). The most important message here is that you need to educate yourself before committing to a crowdfunding venture. One of the lawyers most involved in the crowdfunding movement is Doug Ellenoff, and in his last remarks he emphasized that the only way this movement will succeed is if we all act responsibly together, and especially work to educate both investors and entrepreneurs once the new legislation is enacted.

So maybe you’re thinking a little more seriously about utilizing crowdfunding now. It provides an ideal route for raising capital, and I have to admit, if I get involved with a product-centric startup anytime soon, I’m going to strongly consider using crowdfunding to get off the ground. So to help out anybody with legitimate interest, here are a few notable points made by RocketHub co-founders Brian Meece, CEO, and Jed Cohen, COO, during their presentation:

  • Crowdfunding projects need three things:
    • An engaging project: stress the “why” to investors; engage them emotionally.
    • A network with quality and quantity: crowdfunding is basically taking social capital and turning it into real capital.
    • The goods: Yeah, you need a great product, but “If you build it, they will come” DOES NOT apply. Jed stressed a company needs to “work to reach people on a daily basis.”
  • Current crowdfunding statistics:
    • The sweet spot in terms of capital goals is between $3,500 and $35,000. The companies in this range have the highest percentage of success.
    • The most successful time frame for fundraising is 30-45 days. Companies who set this time period for investing have generated the highest contribution levels.
    • The average contribution per investor is $75.
    • Fees total somewhere around 8-12% of raised capital. This percentage factors in crowdfunding commission (usually 4-6%), due diligence, and other miscellaneous fees.

I trust they know what they’re talking about- RocketHub is one of the top destinations for crowdfunding, along with Kickstarter and Indiegogo. Each platform varies slightly from the next, and each of the platforms’ websites are educational and informative when it comes to their policies, so it’s worthwhile to check them all out before launching your project.

Bottom line: crowdfunding is going to be huge. It provides a win-win model for startups and investors, and legislators are working to make it become even more efficient than it is now. Once the new laws come out, be sure to understand how they’ll affect your efforts.  Jason Best, an industry expert and co-author of “Crowdfund Investing for Dummies,” highlighted an important benefit when he shared the reason crowdfunding is personally important to him. He said right now, San Francisco, Austin, New York City and Boston are the four major entrepreneurial cities that people flock to in order to generate traction for their startup businesses. Crowdfunding can allow for entrepreneurship to thrive outside any of these cities. As a result of these new platforms people across the country will be able to connect with each other, fund each others’ ideas and grow their businesses, all by advertising online and consequently raising funds.  Since a startup can reach interested investors from any part of the United States, there won’t be any need to relocate to one of those four hubs to find a community enthusiastic about investing in entrepreneurship. But if you feel compelled to relocate, you could do far worse than moving down to the Capital of Texas… I’ve only been here for three years, and I’m sold.

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