Accessing Fresh Capital Sources

Right now, all sorts of nonprofit causes and entertainment projects can receive cash donations from ordinary people through crowdfunding websites such as IndieGoGo.com, KickStarter.com, and RocketHub.com. But because of securities laws intended to prevent fraud, for-profit businesses aren’t legally allowed to raise funds from large numbers of donors to finance their ventures without first registering with the Securities and Exchange Commission or complying with restrictive SEC regulations.

That’s soon to change with the Entrepreneur Access to Capital Act, designed to help startups tap sources of capital other than bank loans, venture capitalists, and angel funds. “Given the dire need for investments in startup and high-growth companies,

lawmakers have been pushing to allow individuals to make $1,000 to $10,000 contributions in new or existing companies,” says Thomas “Danny” Boston, member of the Black Enterprise Board of Economists and producer of the Gazelle Index, a national survey of minority-owned firms. New financial regulations have made it “next to impossible for small business owners, especially black businesses, to get bank loans–unless they have a near stellar credit record,” he says.

The practice of crowdfunding appears to provide a reasonable way around th

is barrier, Boston says. However, he warns, it also could be easily abused since any would-be entrepreneurs could use crowdfunding for fraudulent undertakings.  Congress is still fiddling with the details, in part to make sure investors are well-protected. But Boston believes “to be successful, crowdfunding would need extensive transparency and regulatory controls to avoid abuse.”

The Entrepreneur Access to Capital Act, which has bipartisan support, was approved by the House of Representatives last fall with the intent of making it less arduous, less expensive, and a lot quicker to raise seed funds and grow businesses. Startups could use crowdfunding without having to register first with the SEC to raise up to $2 million from an unlimited number of individuals who can invest up to $10,000 each. Current securities laws allow only

accredited investors (such as someone with a $1 million net worth) to buy a financial stake in a business, with few exceptions. Entrepreneurs could use crowdfunding websites to post information about their businesses and offer perks such as T-shirts in exchange for financial donations.

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“Anyone can use crowdfunding to fund any business idea,” says Slava Rubin, CEO of IndieGoGo. “By making an impassioned pitch to the people in your network and beyond, you are able to put yourself out there and discover what opportunities and funding might come your way.”

Small businesses can optimize crowdfunding, Rubin says, by using it for presales to

demonstrate product demand. “Usually when you are looking for bank funding or venture capital to start your business, you need to prove first that you have a solid, profitable idea,” he explains. “With crowdfunding you have the opportunity to prove there is a need and a demand for your product. People who believe in your idea will fund your venture.”

Furthermore, by using creative videos to engage others, and using Twitter, Facebook, and e-mails to promote that engagement, you can easily and readily test your marketing message and approach on your target audience, adds Rubin. On IndieGoGo.com, campaigns that use video receive, on average, 114% more funding.