The Great Debate

It’s an old, and at this point weary, tale that women entrepreneurs receive far less venture capital than men. Women currently own 46 percent of all American small businesses, generate $1.3 trillion in revenue and employ 7.7 million people. Yet Dow Jones Venture Source says that of the U.S.-based companies that received a round of venture capital financing in 2010, roughly 6 percent had a female CEO and 7 percent had a female founder.

Against this backdrop, it is interesting to look at a new crowdfunding law that was passed as a provision of the JOBS Act in April. The law, which will be effective in early 2013, is an exemption to existing securities law that for nearly a century has enabled only wealthy individuals or banks to offer entrepreneurial capital. Kevin Lawton argues against the arcane securities law in his book, The Crowdfunding Revolution, saying that it stymies the democratization of investing.

The crowdfunding law frees entrepreneurs to accept capital from “the crowd.” Under the new law, people who earn less than $100,000 in annual income may invest up to $2,000, or 5 percent of their income (whichever is greater), in businesses of their choosing via approved intermediaries. People who earn more than $100,000 can invest up to 10 percent of their income.

The power of the crowd has demonstrably attracted women already. I recently polled the three preeminent crowdfunding websites: Kickstarter, Crowdrise and Indiegogo, to find out how many women-led projects their sites host. Crowdrise, a platform that raises money exclusively for charities, estimates that about half of its users are women. Kickstarter told me they don’t have the information. Indiegogo had more to say, pointing out that in 2010, 42 percent of its successfully funded ventures were led by women.

These online platforms offer “gifts” in return for their investments – things like, at Kickstarter, “a copy of what’s being made, a limited edition or a custom experience”. Investors under the new crowdfunding law will actually receive equity in the businesses they support.

A few weeks ago, President Obama signed the JOBS Act into law, making equity-based crowdfunding legal for businesses that want to raise capital in smaller amounts than traditional venture capitalists or accredited investors supply. Depending on who you ask, crowdfunding is either going to democratize access to capital and serve as a boon to small businesses across America, or it will be rife with con artists intent on bilking seniors out of their hard-earned savings.

Let’s hope the former is true. But concerns about fraud must be addressed so the emerging market can thrive without being spoiled by fraud and scams.

The Securities and Exchange Commission is currently writing rules that will govern crowdfunding and, it’s hoped, guarantee its success. (Disclosure: I worked as a securities lawyer at the SEC from 1986 to 1990.) To properly regulate crowdfunding without suffocating it at inception, the regulators at the SEC must strike the right balance between guarding against fraud and allowing the marketplace to work its will.