Is Crowdfunding the Startup Funding Source of the Future?

The problem is well known within the small business community. Although Washington might say that the environment is better for business startups looking to open their doors for the first time, the reality is much different. Funding sources are hard to find and without capital, businesses in the beginning phases of development find it difficult to move past the idea stages.

There’s a new type of funding perfect for small businesses but under current laws, this funding option is illegal. Crowdfunding works like this: If you were opening up a new coffee shop but didn’t have all of the money needed, you could go to one of the many crowdfunding sites online, place your business plan for all to see, and ask for a certain amount of capital.

Those who read your plan and expected profits over a period of time may elect to invest in your business. The funding by each individual investor may not be large but once the many investors come together, those small amounts add up to your requested amount.

Because of existing investing laws dating back to the 1930s, a business can only have a relatively small amount of investors without falling in to the Securities and Exchange Commission’s rules for a publically traded company but small businesses don’t have the expertise to comply with these laws and hiring attorneys to help would eat up value startup funds.

This is only one of the ways that existing laws make crowdfunding both illegal and impractical. Congress has proposed new legislation that would make crowdfunding legal providing certain stipulations are met but only the House of Representatives has passed the bill.

Most agree that current laws prohibiting crowdfunding exist to protect investors from scams that could result in large scale loss but they also protect small businesses and the Federal Government from investors who could find loopholes in laws that would allow for abuse.

Still, as technology improves and more investors are interested in funding small businesses especially when it means a smaller scale investment, crowdfunding is probably here to stay but the form it takes under new laws may be different than the current model.

There are crowdfunding-style website already online but they are often only open to investors with a lot of funds to invest so only a small number of investors commit money to the businesses. These businesses are carefully screened before they are offered to these investors.

Currently, crowdfunding may be illegal but it probably won’t be for much longer.