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EmptyTimCup
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And... The Bureaucrats Begin Spreading FUD About Crowdfunding
from the run-for-your-lives dept
We've been waiting patiently for quite some time now to see the SEC's "rules" for equity crowdfunding. As you hopefully recall, earlier this year, the JOBS Act became law, and one part of that was the legalization of certain forms of crowdfunding for equity (i.e., ownership of a company). You're probably already familiar with crowdfunding for things like pre-sales. And you may be familiar with things like crowdfunding loans, via services like Prosper and LendingClub. The JOBS Act is supposed to enable a different form of crowdfunding: for equity investments. Thus, in theory, a startup could not just let people pre-pay for a product they're developing, but could also actually purchase a tiny bit of stock in a company. Other countries already have this, but in the US it went against SEC regulations concerning the hoops you have to jump through to offer any of your equity to the public, rather than just a smaller group of accredited investors.
There's been a fair amount of talk about this effort, and a bunch of companies chomping at the bit to get into the market once crowdfunding for equity is officially in place. The main holdup? The SEC. As part of the law, the SEC is supposed to put forth rules for how such crowdfunding can work. But the SEC made it quite clear before the law passed that it didn't like this idea -- not one bit. So I've been quite curious to see what rules it would eventually put out... and so far all it's done is keep stalling. The rules were supposed to come out yesterday (which was already postponed from the original date), but instead, the SEC pushed things back another week.
While everyone waits for the SEC rules, various state securities regulators, in the form of the North American Securities Administrators Association (NASAA), are ramping up the FUD about such equity crowfunding. They released a report on the top investment scams... and crowdfunding in general is near the top of the list. They seem especially worried that the space is quickly going to be overcome by fraud:
"The number of entities out there already pitching themselves as crowdfunding entities online has risen in a significant fashion," said Matt Kitzi, NASAA Enforcement Section Chair and Missouri Securities Commissioner. "Just look at web domain names: it has gone from a couple hundred to well over 1,600 in the past year. They are staking up a position to enter crowdfunding market. There will be a lot more to come on this."
In early in August, the Massachusetts Securities Division charged a Lowell, Massachusetts man for a crowdfunding scam, bilking 20 investors who thought they were investing money in a gaming site of $153,396.
Secretary of the Commonwealth William Galvin, who brought the case, wrote to the SEC urging regulators not to let the JOBS Act changes become a tool for financial fraud and abuse. "Longstanding problems in the markets for small and speculative stocks show the pitfalls of relying on the wisdom of crowds."
Crowd funding
Crowd funding or crowdfunding (alternately crowd financing, equity crowdfunding or hyper funding) describes the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations.[1] Crowd funding is used in support of a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, startup company funding,[2] movie[3] or free software development, and scientific research.[4]
Crowd funding can also refer to the funding of a company by selling small amounts of equity to many investors. This form of crowd funding has recently received attention from policymakers in the United States with direct mention in the JOBS Act; legislation that allows for a wider pool of small investors with fewer restrictions. The Act was signed into law by President Obama on April 5, 2012. The U.S. Securities and Exchange Commission has been given approximately 270 days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of investors.[5]
History
In 1997, fans underwrote an entire U.S. tour for the British rock group Marillion, raising $60,000 in donations by means of a fan-based Internet campaign.[6] The idea was conceived and managed by fans without any involvement by the band, although Marillion has since used this method with great success as a way to fund the recording and marketing of its albums[citation needed] Anoraknophobia,[7][8] Marbles,[9] and Happiness Is the Road.[10]
The United States based company ArtistShare (2000/2001) is documented as being the first crowdfunding website for music followed later by sites such as Sellaband (2006), Indiegogo (2008), Pledge Music (2009), Kickstarter (2009), RocketHub (2009), InvestedIn (2010), GoFundMe (2010), Rock The Post (2011) and in the UK Sponsume (2010) and PleaseFund.Us (2011), and Peerbackers (2008).
Electric Eel Shock, a Japanese rock band who have toured the world, became one of the first bands without a previous significant recording deal to fully embrace crowdfunding. In 2004 as an unsigned band they raised £10,000 from 100 fans (the Samurai 100) by offering them guestlist for life.[11] Two years later they became the fastest band to raise a 50,000 budget through SellaBand.[12] They licensed the album internationally including to Universal in their native Japan.
Franny Armstrong was a pioneer of crowdfunding in the production of the eco-movie The Age of Stupid starring Pete Postlethwaite. The film was crowd-funded by a £450,000 budget being raised by selling "shares" to 223 individuals and groups who donated between £500 and £35,000.[13]
Morton Valence are an early example of a relatively obscure band to independently enter into crowd funding without using a third party website such as Sellaband.[14] In 2007 Franny Armstrong discussed her project with bandleader Robert "Hacker" Jessett[15] who adapted it to work for the independent music business raising £20 000 to record and promote the concept album Bob & Veronica Ride Again.[16][17]
Crowd funding's earliest known citation[18] was by Michael Sullivan in fundavlog on August 12, 2006.
In 2012, President Barack Obama signed the JOBS (Jumpstart Our Business Startups) Act; this piece of legislature effectively lifted a previous ban against public solicitation for private companies raising funds.[19] As of August 13, 2012, the Securities Exchange Commission has yet to set rules in place regarding equity crowdfunding campaigns involving unaccredited investors for private companies; however, rules are expected to be set by January 1, 2013. Currently, the JOBS Act allows accredited investors to invest in equity crowdfunding campaigns.
crowdfunding is an interesting idea, I supported an indie game developer @ Kickstarter this way