Crowdfunding, a variation on crowdsourcing, is an Internet-driven way to raise money apart from the traditional capital markets. Since the late naughts its use has increased from $530 million in 2009 to $2.8 billion in 2012. Thus far, however, crowdfunders have not been able to receive a stake in the object of their largesse. Thus, notwithstanding increasing crowdfunding revenues, most contributors are still driven by sympathy or personal interest and receive nothing more tangible than free T-shirts, movie tickets, and the like.
That should have changed a month ago. On April 15, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act that added a new exemption to the application of the Securities Act of 1933 for issuers that raise money through crowdfunding. The JOBS Act directed the SEC to issue regulations by the end of January but so far none have been forthcoming. One of these days, however, the regs will be issued and crowdfunding will add investment for profit to its current hipster image.
One of the perks of being ABI Resident Scholar is the opportunity to do smashups. So listen here if you like as I discuss using crowdfunding as a tool for businesses in financial distress. My conversationalist is David McGrail who has some interesting ideas about using crowdfunding to finance a Chapter 11 reorganization.
In short, the $1 million limit on a single issuer's use of crowdfunding will limit its utility to small cases. But even that's a plus because financially distressed small business debtors have a very hard time getting new capital. More important are changes the JOBS Act made to the exemptions from registration under Regulation D and Rule 144A of the Securities Act.
I don't need to pretend that I know next to nothing about securities law but McGrail knows more than a bit. I learned a lot talking with him and I think our conversation should interest many folks.