Crowdfunding Rules Set to Change — but When, and How?

Since President Obama signed the JOBS Act back in April, both investors and entrepreneurs have been anticipating the possibility of new avenues of start-up capital becoming available. However, the clock is still ticking for regulators charged with actually implementing the law. With about a month left before the deadline, there are still loose ends, inconsistencies and questions within the law that remain unanswered.

Change is Coming… Slowly

The JOBS Act gives the SEC until December 31, 2012 to determine how best to implement the law that allows entrepreneurs to raise up to $1 million in capital via online crowdfunding outlets. These crowdfunding platforms are intended to assist startup companies to secure equity in small amounts from individual investors without the time and costs needed in order to actually register with the SEC.

However, the SEC must still determine how to give entrepreneurs as many revenue-gathering opportunities as possible without tainting the effectiveness of protections that are meant to help new businesses to avoid fraudulent propositions. For example, regulators want to ensure that investors are educated about how to evaluate available crowdfunding proposals and that they are able to monitor the amount of capital investors put into companies through crowdfunding portals.

As of now, the law has a tiered cap in place on all crowdfunding investments based upon individual income levels. There is also uncertainly regarding standards for registered funding platforms. One complaint is the casual nature of many crowdfunding sites don’t align with the fact that investing and the SEC are among the most highly regulated industries around.

Several Hurdles Remain for Crowdfunding

In the meantime, SEC rules aren’t the final hurdle for those who are fans of crowdfunding. The JOBS Act also requires the FINRA (Financial Industry Regulatory Authority) to put a new set of rules in place specifically for crowdfunding platforms and sites. FINRA is a non-government group that regulates exchange markets and brokerage firms. Since the law has not set a deadline for the FINRA to accomplish this, there is no pressure for them to be efficient in these measures.

Some have called the FINRA a “wild card” and have noted that technically crowdfunding is illegal now and will be until the group officially publishes its standards. FINRA will probably wait to draft its rules until after the government has issued theirs, and then the SEC will have to review the FINRA rules for final approval. All in all, this could mean another year after the SEC publication before crowdfunding becomes a truly legal option for businesses and entrepreneurs.

Effective Crowdfunding

That said, crowdfunding shows no signs of slowing down. It continues to grow in popularly as a funding option for small businesses now that its endorsement by the SEC seems imminent. Equity crowdfunding — a practice allowing businesses to sell “stakes” to investors — could be legal in about a year. If you’re considering launching a crowdfunding campaign, there are some guidelines to follow to make your pitch compelling and effective:

1. Come From the Heart

The story you tell about your business or idea should be clear, authentic and concise. You’ll want to make a connection with your potential investors. If possible, create a professionally-done video and narrate it with your personal story related to your idea. Convey the “Why” of your idea — why is it valuable and needed? Why do you believe in it?

2. Build Credibility

Remember that many viewing your crowdfunding campaign won’t have heard of you, so be sure to educate them. Include elements that build your trustworthiness and credibility, such as your business track record and recommendations from others in your field.

3. Focus, and Stay Engaged

Instead of trying to please everybody with your pitch, zero in on a target audience who you know will be interested in your project. Send notices to relevant networks via email and social media. Actively seek out your target audience via these venues, and stay engaged with them! Blog or post to social media regularly with updates about your project — this is a big key to success.

4. Show Investors What You Currently Have

Crowdfunding campaigns that are successful tend to be the ones that already have some measure of success. Show investors quantifiable positive interest from customers, or actual pre-sales. This will further increase your credibility. If needed, wait until your idea is further along in development before going public with your pitch.

5. Choose Your Crowdfunding Platform Wisely

Know who you’re working with. Seek out investors and platforms that you can trust. Vet the site and the other types of businesses on it. Are they in your field? Have they been successful? Do your due diligence. What was the difference between the campaigns that worked, and the ones that didn’t?

The answers to these questions can help you to build an effective and successful crowdfunding campaign.

Matt Scyoc blogs for Laird Hammons Laird based in Oklahoma. Matt blogs regularly about legal news as well as updates within the legal community. For more info about Matt, you can connect with him on Google+ and on Twitter @LinkSource.

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