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Crowdfunding matures to regulation
Although many aspects of crowdfunding regulation are still pending federal approval, the developing social fundraising system can offer growth opportunities for startups.
Crowdfunding was the main topic recently for the Western Michigan chapter of the Association for Corporate Growth at its breakfast series, at Kent Country Club in Grand Rapids.
A panel consisting of Jeff Van Winkle, partner with Clark Hill, Jeff Lambert, managing partner of Lambert, Edwards & Associates and CEO of Relay Fund and Mike Morin, portfolio relations at Start Garden, presented on crowdfunding and fielded questions afterward from ACG members and guests.
Crowdfunding’s origins trace back to crowdsourcing, which was designed to bring together people under a common theme to work on projects, said Lambert. This eventually evolved into using social media to connect with people to raise money, he said, and thus crowdfunding was born.
Lambert said crowdfunding was the most high-profile part of the bipartisan-supported Jumpstart Our Business Startups Act, a law signed by President Obama in 2012 that encourages small business funding through various securities regulations.
That legislation is somewhat muddled today, however, Van Winkle said.
“The crowdfunding article . . . was to take the model of crowdfunding today . . . which is to permit people to buy, to go to one of the portals, websites and either buy goods or services . . . or just donate money,” Van Winkle said. “What the JOBS Act said is, ‘Let’s have real investments. Let’s set up a structure, so you can really invest in a company through a portal.’ And it is not going to be implemented until the FCC has come out with rules.”
Van Winkle said limitations on crowdfunding include how much any individual can put in, based on net income, and how much the company can take, which is set at about $1 million, he said. Although none of the original legislation is set in stone yet, it could also include state regulatory involvement and background checks.
But even if all the crowdfunding regulation passes, it might not actually help the process.
If crowdfunding is going to work, Morin said, it will have to abandon current constructs based on monitoring and enforcement, which operate from a fundamentally different premise.
Transparency provides a higher level of protection than any level of enforcement can, he said.
“One our values is that we believe transparency is more powerful than enforcement," Morin said of Start Garden. "The current constructs are all based on monitoring and enforcement."
“When somebody gets a $5,000 investment . . . we don’t pick up the phone and call them every week and say, ‘What are you doing?’," Morin said. "We’ve got advisors and people working with us, and most importantly, 90 days later, they’re going to get up on a stage, and they’re going to say what they did with their $5,000. We’re counting on that level of transparency to drive behavior, not enforcement.”
When everything is moved to a public platform, the masses have more opportunity call out falsity, Morin said.
“Somebody may get away with ripping somebody off in a small way once, but they probably won’t get away with it twice,” he said.
Co-investing with non-accredited investors
Jody Vanderwel, president of Grand Angels, facilitated the discussion and said crowdfunding would inevitably change the investing space, although it was hard to predict exactly how.
Grand Angels has crowdfunding concerns, however, about reliable investors becoming unevenly yoked with unreliable investors, she said.
“If you’re a credited, active investor and you’re co-investing with a lower credited or not accredited passive investors, how does that work in our model? One of the concerns we have is the sense of reliance,” she said.
“On the other hand, this could bring a lot of seed capital into the market, which Michigan and probably most of the country is pretty short on," she said. "So there are pros and cons there.”