The More the Merrier: Crowdfunding

By: Kevin Mathis, Spring 2019 IAC Student Intern

Sally the inventor has a novel idea that she wants to market.  The problem is that she can’t secure the small amount of capital he needs to jumpstart a business startup.  Banks will not loan Harry the amount of capital he needs because his invention seems too risky.  Harry, Harrie, Harrey, Harré, Harí, Hari, Hairy, and Harrold are investors with capital.  They want to invest in a small business startup.  These guys can’t find any startups accepting individuals only willing to invest a small amount of capital in the business.  What do they do?

Crowdfunding can be the avenue that helps Harry (plus Harrie, Harrey, Harré, Harí, Hari, Hairy, and Harrold) meet SallyCrowdfunding means pooling groups of small capital investors to solicit the capital needed to start or fund a small business.  Crowdfunding permits individuals other than wealthy accredited investors and institutions to invest in private startups and small businesses.  Online portals, commonly known as crowdfunding sites, pair small capital investors with small business startups needing relatively small amounts capital. 

Congress passed the Jumpstart Our Business Startups Act (JOBS Act) to encourage the process of crowdfunding.  The preamble to the Act declares that Congress enacted the law to improve access for emerging startups, like Sally’s, to the public capital markets.  Congress believes that this will increase job creation and economic. Title III of the JOBS Act permits crowdfunding while restricting the amount investors can invest in startups.  The Title III of the JOBS Act restrictions limits investment depending on an individual’s net worth and annual income invest in private startups and small businesses.