The Law of the Crowd

Sometimes breaking news guides our topics, and this post, in particular, illustrates that. Crowdfunding platforms, whether in art, music, or the world of social enterprise, currently don’t allow backers (or investors) to obtain an equity stake in exchange for their financial contribution. Why? A thicket of legal and regulatory hurdles, based in an effort to protect the everyday investor from fraud were established by law, via the 1933 Securities Act. Among other things, the law prevents large numbers of everyday people (you, neighbor Joe, Aunt Sally) from "crowdfunding" private companies.

 

Some people think that’s smart policy; others think it’s paternalistic.

 

If this legal barrier was entirely removed, it could open up a whole new source of funding for social enterprises. In fact, entrepreneurs, including lots of social entrepreneurs, have been asking the SEC to open its eyes to the power of crowdfunding to stimulate small business and promote innovation.

 

And we might be seeing a bit of a change. Mary Schapiro, SEC Chair, recently said in a letter to Rep. Darrell Issa, R-Calif., chairman of the House Oversight Committee that a review rule is in progress:

 

"The agency has "been discussing crowd-funding and possible regulatory approaches" with small-business representatives and state regulators. A petition calling for the securities rules to be eased for crowd-funding share issues of up to $100,000 has been backed by almost 150 organizations and individuals."

 

Schapiro goes to to say that she will be instructing her staff to closely examine the "regulatory questions posed by new capital raising strategies."

 

We’ll see where this leads, but as we’ve said before, thousands of social entrepreneurs need a disruptive financial innovation: a way to connect with the vast pool of capital in the hands of our friends, our family, and the growing number of people who believe business-led solutions allow for a deeper, more sustained impact than old models.