“We can gamble in Vegas. We can donate on Kiva or Kickstarter. But it’s illegal to purchase $100 of stock in a job-creating business? That makes no sense.”
That is the tagline to a new project called WeFunder from three TechStars Boston alum who are trying to garner support for the “Democratizing Access to Capital Act” (S.1791) that would allow entrepreneurs to crowdfund startups. Launched yesterday with the hopes of getting $100,000 from 100 pledges, the guys behind WeFunder have already seen near $3 million in promised funds from more than a 1000 supporters if the Senate passes the bill.
Different From A Kickstarter Project
The notion of crowd funding a startup is fundamentally different than that of endorsing a project on Kickstarter. At Kickstarter, people fund projects and have no ownership over the project once it is completed. It becomes a lot more complicated when the notion of investing in actual companies is taken into account.
Right now, the only entities that can invest in startups are those that are accredited investors such as venture capital firms or venture banks. What the Democratizing Access to Capital Act of 2011 would do would be to amend the Securities Act of 1933 that outlines when and how investments in companies can be made through the Securities and Exchange Commission. This is where a mess of SEC rules and regulations come into play. Many of the regulations that the SEC implements are designed to protect the investor. The Securities Act of 1933 was put in place in 1933, four years after the 1929 market crash that led to the Great Depression and caused many affluent American’s to lose their fortunes. It was a necessary act that helped protect people but also spur U.S. businesses. To a certain extent, the Democratizing Access to Capital Act fits in the same realm.
Sponsored by Sen. Scott Brown of Massachusetts, the bill comes three years after the market bust in 2008 that started what we now refer to as “The Great Recession.” Many political and business leaders in the U.S. are looking toward the technology sector to lead America back to the heights of economic prosperity. The Wall Street Journal today published an article saying that the next economy will be based on three pillars: big data, smart manufacturing and the wireless revolution. It is clear that the U.S. has the technological prowess to create a dynamic new economy. Yet, with capital markets spread thin, the next big American company working on a technological advance could die for lack of funding before it even gets its feet off the ground.
Tremendous Impact
The impacts of the Democratizing Access to Capital Act could be tremendous. It would open up the flow of cash to startups from real people. The act would allow a single non-accredited investor to put money into a startup they has the power to create jobs.
“Think of it as Kickstarter for equity, where everyday non-accredited individuals can invest up to $1k in a startup they believe in,” said Daniel Sullivan, one of the founders of WeFunder and the founder of crowdsourcing startup Crowdly. “I think this is a really important issue that involves how the general tech consumer can help drive the economy.”
The other two founders of WeFunder are Nicholas Tommarello of Escapist and developer Nick Plante.
Some may think that startups like WeFunder are looking to disrupt the venture capital industry. That is far from the truth. Venture capitalists and bankers are not going anywhere. Startups still need guidance, mentors, legal support and infrastructure that VCs can offer them. They also have more money and better insider knowledge than the individual non-accredited investor. For example, just look to the $2.7 billion that VC firm Andreesen Horowitz has raised in the last three years. What the Democratizing Access to Capital Act does is lower the bar for the transference of money for startups looking to build a great idea. The ability of money to flow freely across the ecosystem should be of great benefit to all involved.
