Published February 17, 2012
Crowdfunding – the practice of startups raising small amounts of money online in order to fund their new businesses -- is currently not legal due to securities laws from the 1930s. Supporters argue that legalization would be a positive for the economy, allowing new companies to "go public" online and letting investors buy a stake of these businesses via the Web and social media.
In November, the House of Representatives passed the Entrepreneur Access to Capital Act which would allow startups to sell securities via the Internet. President Obama has shown support for the measure as well, but there are two separate bills regarding the funding method stuck in the Senate. A lot of questions have been raised regarding investor security when it comes to using technology to seed business ideas.
So what do entrepreneurs think about this model of raising capital? Here's what our small businesses of the day had to say.
Mama Mahoney Creations, Denver, Colo.
Mama Mahoney Creations founder Janice Mahoney, who sells her handmade bags online, said she likes the idea behind crowdfunding and feels it could be a great way for small companies to raise funds for their businesses. Her business has been open since 2008 and is starting to take off, so having access to extra capital through a solution like crowdfunding would allow her to expand more quickly, as the cost of hiring even one employee is great for a small company.
However, she shares legislators' concerns regarding investor protection, she said. Laying a solid foundation for crowdfunding before it takes off is crucial to the model's success, she said.
"Being a responsible company myself, I would want to know that there are safeguards out there for investors," Mahoney said. "In order for the program to be successful, there needs to be some regulation as to who can ask for these funds. That way, the investor has peace of mind that the companies have met a standard minimum requirement or at the very least, all of their information is on the table so that the investor can make an informed decision."
Villain Accessories, San Francisco
Brandi Collins, owner of Villain Accessories, said she has always believed big business would never take small businesses seriously until small companies stopped spending our money with them and started relying on our own communities. Crowdfunding is a way to do just that, however there are major roadblocks for small businesses before this can get off the ground.
"What I find to be very convenient is that for centuries man borrowed from friends and families to get their business and research going and only now when small business has a real chance to utilize the Internet to bypass banks who will lose out on millions of dollars in interest and potentially give real competition to big business that it has suddenly become an issue about 'protecting the investor,'" Collins said.
Investors that want to put money into burgeoning businesses should always proceed with caution, as this is a basic principle in commerce, she said.
"Without a warranty the buyer takes the risk. This applies to any person who is a would-be investor in any situation, be it in a start-up company or new condo properties just as much as it applies to a would be investor on KickStarter, Etrade.com and come the day any type of social media," Collins said.
Charmed Design, New Haven, Conn.
Charmed Design owner Lori Cohn, who sells her handmade jewelry online, said she is pro crowdfunding. This legislation would provide startups the opportunity to access capital in a stalling economy, Cohn said. She does want to see some more investor protection added to the bill before it becomes law, however, Cohn said it does give more people the chance and incentive to invest, who would otherwise not be able or interested.
"Many startups don't require huge amounts of capital to get started, but rather small amounts from more people," she said. "As a solo entrepreneur, having access to legal crowdfunding would allow me to grow in a way I presently cannot. As an example, I was recently approached by an online outfit who wanted to place an order so substantial it could have taken my business to the next level. Given the time frame, and specifically because I don't have access to capital I had to refuse the order.
"If crowdfunding had been available not only would my business have benefited but I could have offered employment to others and given a good return to investors."