The real world has a terrible habit of lagging behind online developments, and small business investment is a perfect example of this. Crowdfunding sites like Kickstarter or Kiva have shown that an entrepreneur can viably rely on donations sent in by complete strangers to help them turn their idea into an actual product.
The problem is that all that business owners can offer in return is a thank you and typically, the finished product in some form depending on how much a user donates. This means that there is no real push to give any money unless the user donating the money would want to buy the product in the first place. There's just no way to invest money in a start-up with the same ease seen with crowdfunding websites.
But that may soon change.
Under current law, anyone who makes less than $200,000 a year or holds less than $1 million in assets qualifies as what is called a "non-accredited investor." A business can only seek funding from up to thirty-five non-accredited investors, and individual investment is also capped at $100 per person, which makes raising capital even harder. Using non-accredited also requires the business owner to jump through a litany of legal hoops, and non-accredited investors have a reputation of becoming very hostile when things don't go their way. Understandably then, most lawyers advise against relying on them for funding.
Obviously this makes it very hard to raise funding via unaccredited investors. Luckily, an act is winding its way through Congress in an attempt to merge crowdfunding and actual investment from non-accredited sources.
Businesses have had quite a bit of success raising funding through social media platforms. Intermediary sites like Kickstarter assure a standard of anonymity, so angry investors won't know whose door to bang on if they don't receive the returns they expected. AngelList, a crowd-based investment site that is currently opened only to accredited investors, has shown the online investment business model is viable.
One part of this Act, dubbed the Entrepreneur Access to Capital Act (H.R. 2930) was passed through the house with surprisingly little fanfare. The Senate's version is the Democratizing Access to Capital Act (S.1791), and it is currently winding its way through various subcommittees.
The major difference between the two is that the Senate bill caps investment at $1,000, while the house bill sets the cap at 10% of the investor's income up to $10,000, but even if the cap is only raised to $1,000 it will still be a substantial improvement on the current situation.
If it passes through the Senate the two bills should be merged easily enough despite the cap discrepancy, and once it becomes law we could see the world of micro-investment dramatically changed. Websites like AngelList and Kickstarter, which both already have a good portion of the market share and a trusted brand will likely open themselves up to non-accredited investors in an attempt to become the intermediary of choice.
Of course, that also means that many crowdfunding sites will have to contend with the US Securities and Exchange Commission for certain investments, creating a barrier of entry for sites that lack the capital needed to create an SEC approved infrastructure. But I sincerely doubt if there will be any noticeable effect on investment levels if only a handful of sites offer intermediary services.
Willing investors stand to make a bit of money, as do intermediary websites and savvy entrepreneurs. I earnestly believe that, if passed, this law will completely revolutionize how many start-ups are funded. We just have to hope that the bipartisan support continues and unfounded fears about this newer system are put to rest.
Deborah Sweeney is the CEO of MyCorporation, an online filing services company that specializes in incorporations and LLCs. Find her online at mycorporation.com and on Twitter @deborahsweeney and @mycorporation.