New Federal Regulations Allow Social Enterprises to Crowdfund Investment

The 2012 Jumpstart Our Business Startups (JOBS) Act, passed by President Obama, contains a litany of small changes in business law, including raising the permitted number of shareholders in community banks and making it easier for startups to go public. But one change, the lifting of the ban on general solicitation, has caught the attention of the social enterprise sector.

General solicitation is the ability of private companies to publicly advertise for investment, a practice that was banned by the Securities Act of 1933. This Depression-era law was intended to reduce fraud by companies using mediums like the radio to solicit investment with inaccurate information or no information at all.

Since then, information has become much more accessible, and some have argued that the necessity of the law has faded. Chance Barnett, CEO of crowdfunder and proponent of the JOBS Act, wrote in an article for Forbes that the 1933 ban “had unintended consequences that hurt honest everyday small business owners and entrepreneurs, restricting them in their efforts to attract potential investors and critical seed and growth capital.”

Specifically, companies seeking investment or making what is formally called a “securities offering” had to register that offering with the Securities and Exchange Commission (SEC), the federal entity that regulates investment law. There is an exemption to the registration requirement–Rule 506–but it contained a provision banning general solicitation.

With the rule changes brought on by the JOBS Act, companies can receive the exemption and solicit investment from an unlimited number of investors. Companies still have to assure that the investors are “accredited,” which is determined by the SEC based on the investor’s assets and income, but the rule change has widened the number of investors a company has access to.

Investment Goes Online

But how are companies soliciting investment today? Compared to the 1930s, the radio may not be the best medium for providing detailed information about startups to investors.

This is where online crowdfunding comes in, and where the social enterprise sector is jumping on the opportunity.Barnett’s company, crowdfunder, and a number of companies like it are connecting investors with startup companies by providing a space where investors can browse in-depth profiles of startup projects.

This differs from the model used by sites like Kickstarter or Indiegogo, which facilitate small donations and do not give any kind of equity to the donor. Still, the idea is similar in that companies and projects are leveraging the entire online community for funding.

Sites like Rock the Post, Funders Club, Circle Up, and Angel List are all playing with the idea of using the same impulse to donate to an independent film or community art project and applying it to serious investment.

Already, a number of Philadelphia-based, socially-minded startups are utilizing these sites. A company called ZumiCare, which connects families with trusted baby sitters, has a profile on Rock the Post. The University of Pennsylvania will be its pilot client, according to the site.

On crowfunder alone, there are eight startups based in Philadelphia, including an urban gardening company and a soap manufacturer, called Hand in Hand, that donates a bar of soap for every bar purchased. Both of these are labeled as “social enterprises” on the site.

As the new rules are rolled out, these sites and the companies and investors that use them are testing the theory that information really is more accessible and that online platforms can serve as a better and more open way to fund startups and social enterprises.