The Crowdfund Act, a bill to reduce restrictions on regular people investing in privately held companies, passed through the United States Senate today with flying colors in a 73-26 vote, having passed through the House of Representatives this past fall. But legislative matters are by definition quite complex (which is, of course, ostensibly why we elect people to deal with them on a full-time basis.) So we talked to Chance Barnett, the founder and CEO of Crowdfunder.com, to get an idea of what this really means for startups, potential investors, and the technology community at large.
You should certainly watch his full interview above, since he has personally been involved in the effort to make crowdfunding a reality for years and is very knowledgeable about both the legislative and business sides of this issue. But here are some of his key points:
Crowdfunding is not Kickstarter
Many people may think that we already have crowdfunding, through sites such as Kickstarter and IndieGoGo. That’s not the case. Today, most regular people are prohibited from investing in private companies unless they become an accredited investor. In order to become an accredited investor, a person has to prove that he or she has a net worth in excess of $1 million, among other requirements.
Kickstarter and the like are actually based on a donation model, Barnett explained: People who give money to projects and companies on those sites are “donors”, not investors. They may get a gift such as a t-shirt or free products in exchange for their donation, but they do not actually get a stake in the company in return for their money. The Crowdfund Act would allow any individual to give money to a company and become a full-on investor — someone who stands to benefit financially if the company is successful (and lose their money if the company tanks.)
Angel and VC funding don’t have to die
The advent of crowdfunding does not have to mean that the existing models of funding tech companies will go away. According to Barnett, Crowdfunder.com does not want to compete with the likes of AngelList, since crowdfunding can actually complement angel investors and venture capital firms. Startups will always need the mentorship that those more established players are able to provide, but crowdfunding will help small, very early-stage companies bridge the gap between just starting up — say, just after they’ve graduated from a startup accelerator — and being able to attract more dollars from more heavyweight backers.
It’s not a done deal yet
Although the Crowdfund Act has indeed gotten the green light from both arms of Congress — the House and the Senate — Barnett says there is still a ways to go before it actually will go into action. Now, the bill needs to be reviewed once again by the House of Representatives, since it has been amended since the last time they saw it. Assuming it gets the rubber stamp there, the bill will go to President Obama’s desk, which should be speedy as he has already pledged support for crowdfunding. But then, the Securities and Exchange Commission needs to give it a look, to ensure that it has enough protections for potential investors.
In the end it could take weeks or months before regular people will be able to invest in startups — and Crowdfunder.com actually gets up and running in earnest. But once it all happens, it could be a big change for the technology industry, and the larger business ecosystem in the U.S.