Barriers to Crowdfunding in the US

Since my recent post exploring the scale of investments and investors involved in financing new ventures (Investment Scale in Seed-Stage Startup Funding) I’ve seen the theme repeated several times.  Make Magazine editor Paul Spinrad posted about Crowdfunded Securities Law on Boing Boing.  I ran into Chicago web-entrepreneurs at last week’s TechCocktail who’ve been exploring the business potential of Crowdfunding startups.

On Boing Boing, Paul Spinrad links to a great piece by Tim Kappel focusing on artists raising money to record albums. The amount of money involved and the relationship of a crowd to a planned venture are similar in tech startups so most of the conclusions can be transfered to discussing seed-funding for startups.  Tim goes into a bit of detail on some successful crowdfunding models in Brittan and Germany and talks about how those models would work in the US.  These are models where the crowd expects to make money on their investments and for that reason, they won’t work in the US.  Our regulatory system is built in a way that burdens investment securities with no lower limit on how much money is being invested.  For Crowdfunding to be a success for startups in the US new ground will have to be explored.  Can existing exemptions in securities laws be leveraged in a way that the smaller amounts of capital being raised are not dwarfed by the regulatory burden of raising that capital?

I certainly hope there’s a way for this to work, I can’t imagine a more efficient way for seed-stage companies to get off of the ground than by having a self-interested group of their peers backing them.  The financial support would be magnified by having hundreds of self-interested fans, followers, beta-testers, users and customers.  A strong cocktail for quickly reaching product-market fit.

In some related research, I took some time to check out sharespost.com where one can “anonymously buy and sell private company shares.”  They have a detailed set of legal disclaimers to limit their liability and more importantly, to exempt the site from some SEC regulation.  I’m sure the click throughs and other contracts you make when actually buying or selling through the site are even more intricate.