Crowdfunding: The Next Evolution in Small Business Finance

Crowdfunding is now just about old news for many creative businesses: artists, software outfits, game designers, musicians, and many more. Crowdfunding platforms offer new ways to fund many types of projects. Crowdfunding is now, in aggregate, a multi-billion dollar source of funding for creative projects of all kinds.

Early Years of Crowdfunding: Pass the Hat
Early Years of Crowdfunding: Pass the Hat

This past Monday, Susan Billeaud was our featured guest for TechsmARTs. Susan is a small business attorney who has been following recent changes in public policy regarding crowdfunding. From her presentation, we heard estimates that in 2013 alone, crowdfunding will raise somewhere between $3 billion and $5.1 billion. (You can find the audio recording of this presentation at the bottom of this post.)

But what are these public policy changes that are coming? Will they bring more opportunity for artists to raise funds for projects?

Last year, a new law went into effect, called the JOBS Act, or “Jumpstart Our Business Startups Act.” The act enables new regulations that will give entrepreneurs the ability to offer equity stakes to investors in crowdfunding campaigns. If you have a for-profit project (or company) that you want to launch in the “traditional” crowdfunding scenario, you might offer trinkets or even copies of your work or limited edition souveniers to people who give to the campaign. But with the new regulations you will be able to offer, instead, ownership stakes in the company. If the project is successful and the company is profitable, the profits are then distributed back to the investors.

Crowdfunding Today: Gifts or Merchandise in Exchange for Funding
Crowdfunding Today: Gifts or Merchandise in Exchange for Funding

Before you jump up and down for the great news, there’s one big caveat. Once a law is passed, the regulatory agencies have to take their time to catch up. That’s not necessarily a bad thing — better to have a policy apparatus than chaos. The Securities and Exchange Commission is still gathering public comments on how to structure the rules that will govern equity crowdfunding.

In the meantime, Susan also presented an alternative. If your company is based in Georgia, and all of your investors are residents of Georgia, and your operations are in Georgia, and… see a pattern here? If all these things are in Georgia, there’s no need to wait for federal rules to take effect. The State of Georgia has what is called the Invest Georgia Exemption available for this very scenario. So you’ve gathered a large group of small investors — all of them Georgia residents — for your project, or your art studio, or some for-profit venture. Hire yourself a decent attorney and get a little help in filing Form GA-1 to qualify for an exemption from many of the rules that would normally govern companies looking for investors.

Susan’s presentation included more detailed information about these rules — both at the federal and state levels — and what sorts of opportunities these provide.

Crowdfunding Tomorrow: Equity in Exchange for Funding
Crowdfunding Tomorrow: Equity in Exchange for Funding

This topic is somewhat of a departure from many of our previous TechsmARTs discussions. But with technology having enabled the spread of crowdfunding, I felt this was still a relevant topic. And I believe it helps to know this new tool is available. I would be interested to know of any artists who take advantage of this opportunity.

The essential scenario is this: You have a big project that you would like to get funded. You have a revenue model in place and projections to show that this project will be profitable. So you want to ask a lot of people to invest a little bit of money each. In return, you offer them an equity stake in the project. When the profits come in, they’re distributed back to the investors. What sorts of arts businesses might be interested in this sort of opportunity?

Federal vs Georgia Regulations on Crowdfunding (follow along with the audio)
Federal vs Georgia Regulations on Crowdfunding (follow along with the audio)

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