Guzman Law Group

Blog

Blog & News

Crowd Funding: The Rules of the Game

Imagine that you need to raise $100,000 for your business. With limited options, you seek the internet as source of funds. You place a campaign on a third party website that allows you to reach infinite amounts of people, who may want to donate to your cause in exchange for different types of creative gifts you offer in return. A California based company, Pebble Technology did just that and surpassed its $100k goal to set an incredible record of securing over $10 million dollars in just thirty days! Granted, this is probably the highest campaign to date; however, it begs the questions: How did they do it and what are the rules of the game?

Well, as most entrepreneurs know, access to capital has been increasingly difficult for small businesses, which in turn affects jobs, tax revenues, and a host of related areas.  Fortunately, on April 5, 2012, the Jumpstart Our Business Startups Act (JOBS) was signed into law, allowing crowd funding to exist as a way to infuse much needed capital into the business sector.  Crowd funding is a way for the "crowds" to invest online in ventures of their choosing in exchange for equity.  Currently this does not comport with securities laws; however, the Securities and Exchange Commission (SEC) is actively setting forth rules that implement the JOBS Act provisions on crowd funding, so that the balance between access to capital and reduction/prevention of fraud can effectively be balanced.  One of the key issues relates to third party websites that serve as a conduit between the entrepreneur and the investor. These portals are the subject of debate in terms of how their role will be shaped to effectuate that balance of providing access to capital and protecting from investor fraud.  While sites currently exist under the donative (gift) model, where causes, business, and various projects have sought funds in exchange for gifts, this area of business and law is about to propel to new levels, particularly once the SEC and FINRA (Financial Industry Regulatory Authority) rules are established.