• <div class="header-image" style="background-image: url(/live/image/gid/4/2611_Header_V6N2_web_4.rev.1518551584.jpg);">​</div><div class="header-background-color"/>

A New Type of Fundraising

November 04, 2014
The first “truly consumer” 3D printer will carry the M3D logo rather than that of HP or Brother. M3D LLC is a Bethesda, Maryland-based startup that produces the Micro 3D Printer that retails at a starting price of $299. Yet rather than approaching a bank for its initial funding, M3D and its founders, Michael Armani and David Jones, turned to Kickstarter, one of a handful of crowdfunding platforms that allow small businesses to raise funds online from everyday consumers or donors. In return for donating amounts ranging from $1 to $10,000, donors to the Micro 3D Printer campaign received gifts such as a mention on the M3D website or the promise of a Micro 3D Printer. To date, the Micro 3D Printer project has raised more than $3 million, far surpassing its initial $50,000 goal (Armani).

By Marilyn Yang, W’17

As the Micro 3D Printer project demonstrates, crowdfunding can be a powerful tool for fledgling small businesses, allowing them to tap into social media networks and “viral” trends. Entrepreneur Magazine aptly describes crowdfunding as “the social media version of fundraising” (“The Basics of Crowdfunding”). Crowdfunding shifts influence toward the common consumer; by making a donation, the consumer helps turn concepts into reality.

What if instead of receiving gifts, donors received equity of the business running the fundraiser? Such a form of crowdfunding, securities-based crowdfunding, involves general solicitation or advertising; therefore, it is currently only legal for accredited investors, or investors who have a net worth of more than $1 million or who have an annual income that exceeds $200,000 in the two most recently completed years, with the expectation that the annual income would exceed that amount in the current year. Now, the Jumpstart Our Business Startups Act of 2012, commonly referred to as the “JOBS Act,” creates a new exemption that will permit securities to be sold to the general public via crowdfunding intermediaries without first having to register with the Securities and Exchange Commission (SEC) the offer and sale of those securities. But first, the SEC must create rules to implement the requirements of the new exemption, including rules designed to protect crowdfunding investors from fraud. (“The Basics of Crowdfunding”).

The SEC’s proposed rules were released in October 2013, initiating a 90-day public comment period. Key highlights of the JOBS Act and the proposed rules include investment limits and disclosure requirements: the amount individuals could invest through securities-based crowdfunding would be capped depending on the investors’ annual income or net worth, and companies would be required to disclose their primary officers, directors, and any investors owning more than 20% equity (Clifford). In addition, generally any equity purchased through crowdfunding must be held for at least one year, transactions must take place through an SEC-registered intermediary, and only U.S.-based companies with a specific business plan would be eligible to use the exemption (Clifford). Crowdfunding intermediaries could come in the form of either a registered broker or a funding portal, which is a completely new type of SEC-registered entity.

In testimony to the Senate in May, SEC Chair Mary Jo White described the equity crowdfunding rules as remaining a “top priority” in the agency’s agenda (White). Following the release of the proposed rules and throughout the public comment period, the SEC has received much feedback from a wide spectrum of market participants.

During the public comment period, the Investor Advisory Committee, established by Section 911 of the Dodd-Frank Act to advise the SEC and composed of law professors, lawyers, members of consumer protection groups, and other stakeholders, published several recommendations regarding these proposed rules, many of which concern equity funding “portals,” – the securities-based crowdfunding counterpart of sites such as Kickstarter. The Committee recommended that the SEC revise its proposal to require collaboration by portals so that an investor would not be able to “portal-hop” to bypass net worth and income requirements and to force portals to provide disclosures and educational materials directly to investors rather than simply referring to links on their websites (Dunn). It also proposed that portals be allowed to reject investors and offerings “that they believe could pose an undue compliance or fraud risk” (Dunn). This recommendation is actually echoed in the crowdfunding portal community; in the proposed rules, the SEC stated that it appears likely that crowdfunding intermediaries would be considered issuers for purposes of the liability provision (Clifford). The Financial Industry Regulatory Authority (FINRA) is currently in the process of creating a regulatory system for funding portals (Say).

Courtesy of Fundable. Full infographic at: http://www.fundable.com/blog/crowdfunding-infographic---the-jobs-act-explainedIn the realm of securities-based crowdfunding, how serious of a concern is fraud? Alon Hillel-Tuch, co-founder and CFO of crowdfunding platform RocketHub, argues that because of the social nature of crowdfunding, social buzz correlates with money raised, allowing fraudsters to be easily discovered (Clifford). The red herring is when a crowdfunding campaign “raises a significant amount of money without a corresponding amount of social activity” (Clifford). In Australia and the United Kingdom, where different forms of equity crowdfunding have already been legal for eight and three years, respectively, no complaints of fraud have yet been raised, according to Kim Wales, founder of Wales Capital, a management consulting firm that focuses on the implementation of the JOBS Act (Clifford). From an investor’s perspective, however, the more safeguards against fraud, the better.

There has been ample buzz surrounding the JOBS Act and its potential impact. Crowdfunding could offer new opportunities similar to those developing under registration exemptions such as Regulation A, an existing exemption from registration for small offerings of securities up to $5 million within a 12-month period, and Regulation D, which contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the offer and sale with the SEC although they must file “Form D” after they first sell their securities (“Registration under the Securities”). For example, start-up Fundrise, which facilitates offerings relying on such exemptions, raised $31 million from major Chinese tech firm Renren and real estate giants Ackman-Ziff and Silverstein Properties (Say). Where entry into the real estate market was previously limited to large, established players, real-estate-focused websites such as Fundrise are shaking up that business model by allowing more types of investors to participate in deals involving hotels, apartment blocks, and other commercial developments (Say).

Small businesses employ roughly half of all private sector workers and create about 75% of net new jobs in the U.S. (“Crowdfunding Infographic”). Through securities-based crowdfunding, the JOBS Act provides entrepreneurs with yet another channel to acquire the funds they need to get started. The JOBS Act’s focus on promoting small businesses demonstrates the prevailing importance of entrepreneurship to the U.S. economy.

 

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees or former employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or other members of the staff of the Commission.

 

References

 

Armani, Michael. “The Micro: The First Truly Consumer 3D Printer.” Kickstarter. Kickstarter, 7 Apr. 2014. Web. 16 June 2014. <https://www.kickstarter.com/projects/m3d/the-micro-the-first-truly-consumer-3d-printer>.

“The Basics of Crowdfunding.” Entrepreneur. Ed. Ray Hennessey. Entrepreneur Media, n.d. Web. 13 June 2014. <http://www.entrepreneur.com/article/228125>.

Clifford, Catherine. “As Comment Period Closes, Debate over Equity Crowdfunding Rules Rages On.” Entrepreneur. Ed. Ray Hennessey. Entrepreneur Media, 24 Jan. 2014. Web. 13 June 2014. <http://www.entrepreneur.com/article/231043>.

- - -. “In Crowdfunding, Who Is Responsible for Preventing Fraud?” Entrepreneur. Ed. Ray Hennessey. Entrepreneur Media, 5 Feb. 2014. Web. 13 June 2014. <http://www.entrepreneur.com/article/231283>.

- - -. “SEC Releases Long-Awaited Rules on Crowdfunding.” Entrepreneur. Ed. Ray Hennessey. Entrepreneur Media, 23 Oct. 2013. Web. 13 June 2014. <http://www.entrepreneur.com/article/229585>.

- - -. “Why Fraudsters Won’t Sink Equity Crowdfunding.” Entrepreneur. Ed. Ray Hennessey. Entrepreneur Media, 22 Apr. 2014. Web. 13 June 2014. <http://www.entrepreneur.com/article/233292>.

“Crowdfunding Infographic – The JOBS Act Explained.” Fundable. Fundable, 17 Jan. 2014. Web. 16 June 2014. <http://www.fundable.com/blog/crowdfunding-infographic—the-jobs-act-explained>.

Dunn, Peter I. “Crowdfunding Update: Still Stuck.” Mondaq. Mondaq, 15 May 2014. Web. 13 June 2014. <http://www.mondaq.com/unitedstates/x/313896/Securities/Crowdfunding+Update+Still+Stuck>.

“Registration under the Securities Act of 1933.” U.S. Securities and Exchange Commission.

SEC, n.d. Web. 15 July 2014. <http://www.sec.gov/answers/regis33.htm>.

Say, My. “Real Estate Crowdfunding: Post-Valuations of $100M for Series A?” Forbes. Forbes.com, 10 June 2014. Web. 13 June 2014. <http://www.forbes.com/sites/groupthink/2014/06/10/real-estate-crowdfunding-post-valuations-of-100m-for-series-a/>.

White, Mary Jo. “Testimony before the Subcommittee on Financial Services and General Government Committee on Appropriations.” U.S. Securities and Exchange Commission. SEC, 14 May 2014. Web. 18 June 2014. <http://www.sec.gov/News/Testimony/Detail/Testimony/1370541815125 - .U6GGdBZQZRk>.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>