Healthfundr is an equity-based crowdfunding platform for health startups. The site provides accredited investors with opportunities to invest in a selection of curated companies working on digital health, health IT, and diagnostic and medical devices.

The JOBS Act and the Affordable Care Act are dramatically changing regulations surrounding crowdfunding and healthcare. Crowdfunding has changed the venture capital landscape and startups in all sectors are using this method to raise  funding. The landscape for health investment is also changing. Funding soared for health IT and digital health companies in 2012, while money continued to lag for life sciences and medical device companies.

CEO Jared Iverson is a former securities attorney with experience working for a pharmaceutical company. He founded Healthfundr in response to shifts he observed in both industries.

“The company is rooted in a desire to see more innovation and capital around health and medical innovation,” he said in an interview with VentureBeat. “A lot of capital goes to areas that are easier to understand or have less regulation, and I’d love to see this sector become more mainstream. This is an area that has a huge impact on quality of life.”

Healthfundr is only open to accredited investors. As of today’s launch, it features three vetted companies that are looking to raise capital. Unlike other equity-based crowdfunding sites like TheFundersClub or CircleUp, Healthfundr works with later stage companies that already have traction and are looking to raise larger amounts. Iverson said there is no shortage of seed funding or later stage capital for health companies, but many struggle to receive first rounds of institutional funding. Healthfundr is meant to be a place where companies that have traction in the market can raise growth capital of a few million dollars.

“Health startups often have to overcome regulatory hurdles and require a higher degree of sophistication and more capital from investors,” said Iverson. “One of the unique difficulties is getting investors to follow-on. We want to fill this hole by being selective about the companies we choose so investors feel more confident in their ability to carry out due diligence.”

Healthfundr is a registered broker-dealer and will take a small portion of the capital raise, either in the form of equity or cash compensation. Iverson’s ultimate goal is to become the main hub for health and medical technology deals and drive funding and interest into this space.

---

HealthBeat 2013 is a new conference showcasing how technology is transforming health care. We'll explore how IT is driving out inefficiencies on the hospital, practice, and patient levels. Check out full event details here, and register here.

---

Since its launch in April 2012, consumer companies have raised more than $10 million on CircleUp. CEO Ryan Caldbeck founded the company after seeing passionate entrepreneurs struggle to attract capital for their products. CircleUp features companies that are already producing and distributing their wares but looking to scale their business and reach a larger market.

“We love that investors are able to see, touch, taste, and experience the company’s products first hand,” said CEO Ryan Caldbeck. “An investor on our site can go to their local Whole Foods or Starbucks to see and test the products, which we believe helps the investor feel more connected to the investment that they are making. We also believe the lack of traditional funding for early stage consumer/retail products creates an opportunity unlike investments in other industries, where the risk of adverse selection for crowdfunding platforms is greater.”

Investors are often reluctant to invest in consumer products companies because they can involve high overhead costs and manufacturing and distribution challenges. As a result, people who lovingly produce natural face creams or kale chips can’t raise the money they need to get their businesses off the ground.  However, consumer products make up a significant portion of the economy, and people are increasingly interested in buying natural, artisanal, handmade items. Caldback founded CircleUp to act as a bridge between promising, vetted companies and investors looking to diversify their portfolio. It seeks to provide a smoother, more transparent channel for investment.

Companies featured on the site raise an average of $1 million and are able to expand their reach through partnerships with corporations like P&G and General Mills. Since the beginning of 2013, the amount of money flowing through the platform has doubled and over 70% of listed companies close deals. Caldbeck attributes this success to CircleUp’s tight focus on this particular vertical. The team has extensive experience that makes it aptly suited to address this sector’s challenges, as well as expertise in the equity-based crowdfunding space.

In a statement, CircleUp said this is the largest raise for an equity-based crowdfunding site.

Union Square Ventures, which also invested in Twitter, Kickstarter, Lending Club, CodeAcademy, and Etsy, led this round. Google Ventures, Rose Park Advisors, Maveron, and others participated in this first institutional round.

“Access to capital is a bigger problem in the African-American community than in non-minority communities,” said founder Nathan Bennett-Fleming in an interview with VentureBeat. “Crowdfunding is a powerful solution to address its unique set of challenges. I want to promote the idea of community reinvestment and provide people with a dedicated way to not only achieve innovation within the space, but also address social systemic problems.”

A University of Michigan study found that while African-Americans are almost twice as likely as Caucasians to begin the new business creation process, businesses owned by Caucasians exist at more than twice the rate of those owned by black individuals. Fleming calls this the “black startup gap” and outlined multiple factors that perpetuate it, with a lack of funding as the first. He said  most members of the black community start businesses on personal savings, credit, and the support of their friends and family because they have historically been discriminated against in terms of loans, funding, and resources. While these problems are getting better, people within the community still have limited interactions with angel investors and venture capitalists, and don’t feel there are viable financial channels bring their business to the next level.

Bennett-Fleming worked at Goldman Sachs during a college summer, attended law school, and worked on crowdfunding legislation surrounding the JOBS Act. He witnessed the difficulty that people in the African-American community had trying to find financing and realized that crowdfunding could help democratize access to capital as well as draw on the strength of the community. Along with classmates of his from Morehouse - Olugbolahan Adewumi, Elgin Tucker, Kyle Yeldell, and Christopher Hollins- they set out to build BlackStartup.

“Our community is under-valued and highly profitable,” he said. “There is already a strong affinity within the community on the ground and the ability to market directly to a community that is under-marketed creates a significant value proposition. There is already a trend towards more focused, niche crowdfunding platforms. It is a vehicle to better use the tremendous consumer and wealth power of a specific community to take on its challenges.”

The site takes a standard approach to crowdfunding- a selection of vetted projects are featured on the homepage with a project description, background about the founders, and specific goals. Members of the community back projects that pique their interest and if the goal is successfully reached, the project owners get the money to carry it out. Seven projects went live with the launch today, including a site that drives commentary on news of the day, a math curriculum taught through playing the piano, a family business that makes handmade hair products, and a mobile bakery that teaches people how to make desserts.

BlackStartup recently won the Yale Entrepreneurial Institute’s Fellowship, which invokes $20,000 in seed capital, an elite mentor, and a 10 week business boot camp in New Haven, Connecticut. Bennet-Fleming said his ultimate goal is to provide a funding solution that extends to all marginalized communities on a local and national level, to help them overcome obstacles attracting capital. BlackStartup is based in Washington, DC.

Photo Credit: BlackStartup 

Updated with equity-based growth information.

Crowdfunding is getting so much bigger than Kickstarter. Last year alone, it generated 1 million successful campaigns and $2.7 billion across the globe.

Research firm Massolution gathered that data from 308 active crowdfunding platforms (CFPs) worldwide via the website for its 2013 Crowdfunding Industry Report. The information shows that crowdfunding nearly doubled last year, with an 81 percent increase over 2011. North America and Europe, taking second, dominate the market, with a more than 95 percent stake.

Massolution, which specializes in the crowdsourcing and crowdfunding industries, is predicting these figures will reach $5.1 billion this year, with North America contributing 72 percent.

Last year saw significant milestones for crowdfunding. In January, the Elevation Dock became the first to pass $1 million. Then in April, the Pebble smartwatch beat this achievement in only 28 hours, going on to raise $10 million total.

“While lending-, donation-, and reward-based crowdfunding have thus far been leading this global financial revolution, equity-based crowdfunding is about to take center stage in the U.S.,” said Massolution chief executive Carl Esposti in a press release. It’s expected to reach $166 million in 2013, up from $116 million this year.

“The JOBS Act, which will allow non-accredited investors to make investments in exchange for equity, is expected to go into effect by the end of 2013,” said Esposti.

President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law a little over one year ago. It gives regular people the chance to become investors.

This is an “untapped funding source” that will help entrepreneurs who need funding, Massolution analyst and research director Kevin Berg Kartaszewicz-Grell told VentureBeat.

“Crowdfunding offers a great opportunity for everyone to leverage their social networks and transform social capital into financial support,” he said. “Clearly, companies that already make use of distributed networks — such as software developers, media companies, Internet companies, etc. — are in positions of relative strength because the communication networks have already been established, and reaching out via crowdfunding campaigns is thus a natural extension of their networking activities.“

Massolution found that crowdfunding volumes grew 105 percent to $1.6 billion in North America and 65 percent to $945 million in Europe. All other markets expanded close to 125 percent. Most of this growth came from donations (680,000 campaigns) and lending (about 250,000), the latter stemming mainly from crowdfunded microloans and community-driven loans to local small- and medium-sized entities (SMEs), along with the adoption of reward-based campaigns, like those on Kickstarter.

Social causes drive 30 percent of all activity, which Massolution expects to change as more startups and SMEs begin leveraging the platform. The graphic below shows the 10 most active categories by percentage.

Video games were also huge beneficiaries of crowdfunding last year, raising $83 million on Kickstarter alone. Kartaszewicz-Grell said that most game developers would fall under “Software and Smart Apps,” “which is an emerging category I personally expect to see growing rapidly. Software development — especially video games — is a perfect match for crowdfunding because this space has a relatively high portion of its transactions done online and because developers are more used to communicating their state of development via social media.”

Massolution composed its report from survey responses received in the first six weeks of 2013. It was unable to reveal which participating crowdfunding platforms were the most active.

Photo credit: Massolution

The letter is a green light for FundersClub and validation that its investment model is legal. The news is significant for the venture capital and finance industries as well as startups looking for more flexible methods of fundraising.

“Venture capital has supported iconic innovative companies, but interestingly enough, the industry itself has been untouched by the Internet,” said FundersClub founder and CEO Alex Mittal in an interview with VentureBeat. “This letter from the SEC officially recognizes that FundersClub is a venture capital adviser. This is the first time in history the SEC has recognized the concept of online venture capital.”

FundersClub is a controversial company that pioneered a new form of investment when it launched out of Y Combinator last year. It provides a platform in which accredited investors access a selection of profiles of promising early-stage companies, vetted and curated by the FundersClub. Members of the community may make small investments in companies that appeal to them. FundersClub then combines the money together into one fund and gives it to the startup under its own name. While the funding is crowdsourced, it shows up as one entity on the cap table.

Many people questioned the legality of this approach because FundersClub is not a registered broker-dealer and the SEC has yet to fully implement the JOBS Act. FundersClub refutes these claims by stating that it is simply turning the already legal offline work of a venture capital adviser into an online process.

The SEC, as of today, officially agrees.

“We are not broker-dealers, we are not working within the JOBS Act provisions or exemptions, and we are not crowdfunding,” Mittal said. “We are the first to demonstrate that it is possible to practice traditional venture capital online. Anything that is new will be looked at from different angles and sometimes bucketed with other things that it is not. It take time for new models to be understood, but we are doing something new and revolutionary that has big implications.”

Making venture capital work online is not just about getting around/approval from the SEC. The industry has remained offline because deals are heavily based on relationships. Investors are understandably reluctant to write checks to companies they have not vetted personally (if not in person), and many of the deals happen through in-person interactions and referrals from within an existing network.

However, angel investment is changing. Accredited investors often aim for a diverse portfolio, but they don’t have the time or resources to perform due diligence for a range of companies. Furthermore, investors from outside Silicon Valley are interested in tech startups, but through geographical and network barriers, they do not have the connections they need to find desirable prospects. FundersClub gives them a chance to get involved with choice opportunities and easily make investments. Startups, who are wary of an overcrowded cap table, appreciate that FundersClub takes care of the leg work.

In October, FundersClub raised a massive $6 million seed round and just last week announced a $1.1 million fund to invest in Y Combinator startups. The first startups FundersClub featured were members of the same Y Combinator class. Each successfully achieved its fundraising goal, raising hundreds of thousands of dollars, and the platform has since expanded to include startups in other sectors and locations. To date, FundersClub has invested $4 million in startups, and portfolio companies have raised a total of nearly $26 million.

The National Venture Capital Association accepted FundersClub into its ranks earlier this year, making it the first and only online platform in the group of over 400 members. While that news was also exciting for the team, it did not offer the same degree of legitimacy, nor the comfort of knowing they won’t be prosecuted.

The JOBS Act is still in limbo, but the SEC’s no-action letter sets the stage for an entirely new environment for early-stage fundraising that is more flexible for people on both sides of the equation. Read the letter from the SEC.

WeFunder is a online investment platform. The ultimate vision is that anyone, regardless of wealth, can invest in startups. The platform is currently only available to accredited investors, until the SEC publishes the final regulations for the JOBS Act which changes the rules for crowdfunding.

“We are not just giving startups dumb, quick, and easy money,” said founder Nick Tommarello on stage at Y Combinator’s demo day. “With the power of the crowd, we are giving them an army of evangelists that feel a sense of ownership and are driven to help their startup succeed.

WeFunder finds and features promising startups on the site to a community of almost 14,000 investors. Those people have the opportunity to put as little as $1000 into companies that catch their eye. All of the money raised on WeFunder is put into a trust account managed by the startup’s law firm and then transferred into their corporate account once the campaign is completed.

This strategy opens up investment opportunities to a larger community and gives startups more flexible fundraising options. Tommarello said this is like pressing a “green button” to raise money, instead of going through the traditional, labor-intensive channels. Some voices in the Valley say crowd funding for startups is a bad idea because it can lead to a cluttered cap table and prevent fundraising opportunities down the road. However, Tommarello said that a large number of small investors can be a strength.

WeFunder is comparable to The Funders Club, which launched as part of the last Y Combinator class and has since raised $6 million and attracted international attention from the media, investors, and entrepreneurs. The JOBS Act may not be in action yet, but when it is, it will democratize the early-stage investment process for startups and investors.

Digital publishing startup Glam Media has reportedly filed documents for an initial public offering, according to a BusinessInsider article that cites anonymous sources familiar with the company.

But don’t bother trying to find any evidence from publicly filed documents with the SEC. The report indicates that Glam filed confidential documents as part of a new secret IPO process that was initially created under the 2012 Jumpstart Our Business Startups Act (JOBS Act). The act specifies that companies with under $1 billion in revenue can begin discussions with the SEC about an IPO before announcing such news publicly.

VentureBeat has reached out to its own sources for more information about Glam Media going public, and we will update this post accordingly if we find out any new information.

Glam is perhaps best known as an advertising/media company primarily focused on women’s interests, but it has since expanded into several other genres, including men’s lifestyle/interests, entertainment, and food. The site claims to bring in over 356 million unique visitors per month across all its properties (including those under the Ning umbrella), and it has a greater audience reach than aging web portal AOL, as VentureBeat reported back in July 2012.

News of Glam filing an IPO have been rumored several times over the last few year. Initially, it was planning to go public in 2012, but the new procedures created in the JOBS Act may have had something to do with the delay.

Founded in 2002, the Brisbane, Calif.-based startup has previously raised $155 million in funding to date from Aeris Capital, Hubert Burda Media, Accel Partners, DAG Ventures, and others.

Violin Memory and its super-fast Flash memory service is hurtling toward a highly successful IPO.

Bloomberg Businessweek reported today that the Silicon Valley company filed to go public under the Jumpstart Our Business Startups (JOBS) act. This allows Violin Memory to keep its public offering under the radar until three weeks prior to the roadshow; for this reason, it has not yet appeared in the U.S. Securities and Exchange Commission.

According to Bloomberg, the valuation on the table is a sky-high $2 billion.

Spokesperson Suzanne Chan declined to comment on Violin Memory’s filing.

Violin’s storage device are in Oracle’s and Cisco’s products, and it recently announced an alliance with Symantec. As we reported, Violin became a storage system maker in August — a major step up in the electronics food chain.

This spring, it raised a $50 million fourth-round, bringing its total venture capital funding to $172 million. At that time, it was valued at more than $800 million.

With the enterprise technology space on the upswing, this will be the second IPO this summer. Workday confounded expectations with its ass-kicking public offering. In early trading, the human resources software maker soared 72 percent.

DETROIT — The past decade has seen a 93% drop in IPOs for sub-$50 million companies, Mark Hatch, CEO of do-it-yourself workshop TechShop, said today.

Speaking at a Techonomy Detroit session on the DIY economy and crowdfunding, he attributed that squarely to bureaucracy and legislation such as Sarbanes Oxley, the law that tightened rules and added regulation for public companies in 2002, after Enron, Tyco, and other high-profile financial scandals burned investors and reduced faith in stock exchanges.

“We live in a completely different space than we did 10 years ago,” said Hatch, citing the explosion of innovation as tools, design, and even fundraising is being democratized.

Square made its first prototypes at a TechShop. The world’s fastest electric motorcycle was built at a TechShop. And OpenROV, the open source robotic submersible, was designed and built at a TechShop.

The problem, in Hatch’s view, is that “small” exits via initial public offerings have almost disappeared, due to the extra regulation. Which means that companies have to either get huge, get acquired, or stay at mom-and-pop scale.

De-regulating investing is a big priority for government – Congress and President Obama have recently tried to make it easier for companies to get funding by passing the JOBS Act.

Some think, however, that the U.S. Securities and Exchange Commission is trying to obstruct the act by continuing to make it as difficult as possible for crowdfunding. Hatch is definitely in that camp, having recently posted that the SEC is not following the spirit of the act:

” … the SEC is threatening to derail this legislation by implementing unnecessary and bureaucratic rules that would greatly diminish the impact of this new employment-boosting law.”

More changes may be coming.

While chatting with Steve Case, founder of AOL and current chairman of the Startup America Partnership yesterday, I learned that more changes based on the JOBS Act are coming soon.

And Case, at least, is a little more positive, saying still-existing barriers such as investor certification are going to be eased.

Short form: It’s a way to let more people of modest means become micro-investors in startup companies.

It’s a step in the right direction, probably, but investors still need to be accredited. And some crowdfunding experts say that the way the Securities and Exchange Commission has implemented the new law actually makes investing harder, not easier.

Here’s a quick visual primer from Fundable, a crowdfunding startup, on what the act is, how the changes could affect the 565,000 businesses started every month in the U.S., and how those startups raise money.

photo credit: SP8254 – On a Break! via photo pin cc

Rather than lifting the ban on general solicitation (we’ll explain that in a minute) in order to make it possible for more people to invest in American startups, the SEC proposed rules that would establish various different classes of investors, each perhaps with its own regulations. Needless to say, this move could make it more rather than less complicated for people to invest in startups, erecting new roadblocks rather than clearing away old ones.

Some quick backstory for those of you who assumed crowdfunding would immediately become legal when President Obama signed the JOBS Act into law back in April:

The SEC has been given until 2014 to spell out the specific rules of crowdfunding.

The very first step the SEC needs to take to make crowdfunding not only legal but effective is to change what are called the “general solicitation rules”. The SEC has very strict rules about who can hear about a stock offering and how they can hear about it. The change to those rules will allow stock brokers and dealers to advertise stocks for sale to the public in ways that have not been possible in 78 years (since the SEC was created).

This change is called “lifting the ban on general solicitation”. Lifting this ban will allow private companies to raise money from a larger pool of “accredited investors” now, and in the future (when crowdfunding is permitted), from all investors.

The last important term to understand is “self-certification”. When an investor wants to make an investment in a private company today, the investment banker who sells those shares is required to make sure that investor is accredited — which means they make over $200,000 a year in income or have over $1 million in liquid net worth. How do they certify this today?  The investor signs documents that “self-certify” that they have that level of wealth and understand the investment they are making. This form of “self-certification” is the only way to have a scalable model. Can you imagine if people were forced to submit tax returns or W-2’s? No one would make investments in private companies — way too much Big Brother.

Wednesday, the SEC was tasked with answering the question, “What do issuers need to confirm an investor is accredited?” Rather than stick with the current self-certification path or providing a mechanism for investors to prove accreditation, the SEC said that different investors may need to supply the government with different information based on the “type” of investor they are.

This is concerning because according to the law, there is only one type of accredited investor (again, this is someone with a net worth of at least $1 million or an annual income of at least $200,000). What the new proposed regulation did was make the rules harder to interpret by saying the verification of an accredited investor’s status will change depending on the amount, type of information, and the way in which the purchaser is solicited.

Markets look for certainty before they act. The content of this proposed rule doesn’t provide the markets with confidence but instead creates more questions.

Are you accredited? That should be a yes or no question. Congress gets it. So does the President. By muddying the process, the SEC will make it hard and confusing to implement crowdfund investing but easy for securities attorneys to sue entrepreneurs trying to create jobs.

Uncertainly in markets will likely deter investments and reduce investor confidence. The result of this action will increase capital flows to securities attorneys and NOT to entrepreneurs.

It makes many wonder if the SEC is engaged in a campaign to derail the will of the American people. Last week we wrote an article about The North American Securities Administrators Association (NASAA) listing crowdfunding on its top 10 fraud list, even though in the two years it has been legal in the UK and the seven its been legal in Australia not a single case of successful fraud has occurred.

We have attempted to engage with NASAA and share information with them about the law and how crowdfunding works today in the rewards space as well as in other countries. Unfortunately, our calls and emails inviting them to the table have been met with silence. The crowdfunding industry’s experience with other government entities (including its active engagement with the SEC) has demonstrated that when the crowdfunding industry is able to engage in an open dialogue, the facts of crowdfunding tend to outweigh the vague fear, uncertainty, and doubt that are put forward by people who may be unfamiliar with the mechanics of the social Web.

Congress and the President have signed into law the JOBS Act that will unlock capital flows and innovation for our nation’s entrepreneurs. One just has to wonder if the only jobs that will be created are for securities attorneys due to MORE complicated rules being implemented.

We encourage you to get involved and reach out to the SEC about how this would affect you as an entrepreneur or investor by making public comments here. You can also join industry associations such as the Crowdfunding Professional Association to stay updated and learn how to be prepared within the laws.

Jason Best and Sherwood Neiss led the U.S. fight to legalize debt and equity based crowdfunding, co-authored Crowdfund Investing for Dummies and founded Crowdfund Capital Advisors where they provide strategy and technology services those seeking to benefit from crowdfund investing. 

[Top image credit: Steve Lovegrove/Shutterstock]

Currently, entrepreneurs starting a company can crowdfund, but only by offering products or services in exchange for contributions. That’s due to an SEC rule that forbids the marketing of “private securities,” Econ 101 for shares that do not trade on a public exchange, such as the NASDAQ or NYSE.

The SEC is proposing to amend that rule, which will allow sites like Fundable to publicly offer and solicit the sale of actual shares in companies in exchange for investments. That’s in recognition of President Obama’s JOBS act of 2011, which was intended to open up investment opportunities for startups.

The announcement is a welcome one for crowdfunders such as Fundable:

“We are confident that this is a promising step in the right direction, and look forward to their recommendation becoming a reality after the allocated thirty days of public comments,” said Fundable’s chief executive Wil Schroter. “The execution of the JOBS Act will open up hundreds of millions of dollars of potential investments and make drastic improvements to the US economy.”

Other sites such as Gambitious and Indiegogo would also be able to raise capital for startups with this rule change, but crowdfunding titan Kickstarter would not — unless it changed its community rules. Currently, Kickstarter is only for projects, and explicitly bans “starting a business” as a reason for initiating a funding attempt.

One thing that still blocks most Americans from funding startups: accreditation. All investors who buy equity in a startup through a crowdfunding site must still be accredited investors, which generally means someone richer than you.

Perhaps that’s something crowdfunding sites can work on … we’ve seen how projects can be funded $5 at a time.

Why not startups?

photo credit: Mukumbura via photo pin cc

Crowdfunding in its current state is where a large group of people pool small dollar amounts to help fund ideas. Examples of rewards-based crowdfunding, which is currently legal, include sites like RocketHub and Kickstarter.

Crowdfund investing, which should be legalized under the JOBS Act but which the SEC is still writing the rules for, will allow not just donations but would enable regular people to make investments in private companies and entrepreneurs in exchange for a real stake. (Unfortunately, the SEC, which was supposed to meet on the matter today, has once again delayed the process — more on that shortly.)

The trouble with the NASAA assessment of crowdfunding fraud is two-fold: One, they used a gaming company as an example that was caught two years ago (long before crowdfunding legislation was created) and prosecuted in August. Two, they failed to mention that this so called “crowdfunding” company was funded under the old securities laws (pre-JOBS Act), which makes fraud easier to commit as they keep investments out of the public light, allowing for backroom deals and billions in losses by average American. Some commentators have suggested that Facebook is an example of this.

The old system is broken, which is why the fraud occurred. The gaming company did not use crowdfunding, as it is not legal yet. Crowdfunding won’t be allowed till 2013, as the SEC is still making the rules under which the market will form. Today’s security laws do not have the strong disinfectant power of social media built into them. The many-to-many communication of the social Web creates the opportunity for crowd-diligence – this is not possible in one-to-one communications (like those emails you receive from princesses of far away lands promising great riches…).

Where can we look for real-life examples of fraud in crowdfund investing? In the seven years crowdfund investing has been legal in Australia and in the two years it has been legal in the UK, no cases of successful fraud have been discovered. In donation-based crowdfunding in the US, fraud has been caught rapidly, and always before funds are distributed, as social network uncover the truth. Platforms like RocketHub have created sophisticated algorithms to detect fraud that layer on top of the crowd-diligence process.

Even though crowdfunding has experienced far less fraud than has been experienced under traditional capital-raising mechanisms, has strong support from the president, and has overwhelming bi-partisan support by a sharply divided Congress, the road to enacting the legislation is proving rocky. Today, the SEC missed its second deadline for lifting the ban on general solicitation and has now postponed the meeting for a week. It makes one wonder if the JOBS Act (and the jobs that could be created through it) will be tangled in a sea of red tape.

What is true is that many people do not fully understand what crowdfunding is and the role social media plays in vetting a deal prior to funding. Therefore many believe that grandmothers will squander their savings and parents will lose their children’s college money by irrationally investing in crowdfunding opportunities. Shysters will enter the marketplace and try to take off to the Cayman Islands with investor dollars.

This position ignores all the investor safeguards that exist in the legislation. It also makes the assumption that the crowd, (i.e. hundreds to thousands of people who personally know the company founders or have second- or third-degree connections to the founders) cannot possibly be smart enough to a) identify a good idea, b) determine who is a credible individual, or c) make an informed decision about an investment that they decide to make with their hard-earned dollars.

Just because there’s a new form of investing doesn’t mean there will automatically be more willing investors. Our position has never been that raising money via crowdfund investing will be easy — it won’t be, nor should it be. But it will provide another route to funding for entrepreneurs with great ideas (many of whom may not live in Silicon Valley, Boston, or New York City) and main street businesses that need additional capital to expand and create jobs.

Crowdfunding proponents will share examples of how the crowd has successfully weeded out fraud on donation-based crowdfunding platforms since it has been up and running for the past five years. As recently as May, on Kickstarter, the crowd used social media to shutdown a scam just by sharing collective wisdom. When people brought their accusations to the Kickstarter comments, the instigators made a few weak attempts at deflection then quietly shut down, having raised just under $5,000 (far short of their goal, so that money was never actually released).

When it comes to crowdfund investing, there’s nothing more transparent than social media. It is the disruption that makes crowdfund investing possible. The potential loss by an individual is strictly limited based on income level. Compare this with the fact that anyone can login to their Schwab account and put their entire life savings on a triple down ETF for gold and loose it all in minutes.

Bottom line: Entrepreneurs and the American people are the ones suffering here. We stand ready to work with the SEC to protect investors with commonsense legislation to enable this market to form in an orderly fashion.

Jason Best and Sherwood Neiss led the U.S. fight to legalize debt and equity based crowdfunding, co-authored Crowdfund Investing for Dummies and founded Crowdfund Capital Advisors where they provide strategy and technology services those seeking to benefit from crowdfund investing. 

[Top image credit: Matt Trommer/Shutterstock]

Given there are over 6 million accredited investors in the USA and only about 10% of them have made an investment private shares, this could represent a boon in funding for entrepreneurs. There would be more flexibility to target those people with deeper pockets to help fund startups and small businesses. Countless jobs could be created, giving our economy the kick it needs to get going.

However right before July 4, Mary Shapiro, Chairman of the Securities & Exchange Commission said the SEC was going to miss that deadline. In a House Committee on Oversight and Government Reform hearing, she told Chairman Patrick McHenry (R-NC), who drafted the first crowdfunding bill that passed the House 407-17 including a provision on general solicitation that “they needed more time to consider and implement the rules to lift the general solicitation ban.”

The challenge came down to requirements that the SEC implement rules to assure that issuers who make a general solicitation, such as through advertisements, verify that they are accepting investments only from accredited investors. “We want to create something that is workable and usable,” Shapiro said. The SEC Chair expects that general solicitation rules will be issued “this summer.”

Here we are at the end of the summer, all eyes are on tomorrow’s SEC hearing, and we find ourselves in the same shoes as on July 4. Instead of issuing the final rule as mandated by Congress and the President within 90 days of the bill signing, the SEC has decided to delay and issue a proposed rule whereby the public can comment. The shocking part is that the SEC has been taking public comments since the bill was signed on April 5.

Neglecting to meet the second deadline has drawn the ire of Chairman McHenry, who sent a letter to the SEC on August 16 stating, “By merely proposing to revise Commission rules, rather than revising them, you are failing to follow the law. We are now over four months since the JOBS Act was enacted and over one month past your statutory deadline to implement this section removing the ban on general solicitation. You have had ample time to solicit additional public comment.  In addition, as you know, issuing an interim final rule would certainly not preclude additional public comment nor would it preclude revising the rule at a later date as appropriate. Thus the fact that you are now proposing a rule after you’ve had 130 days to seek additional comment can be viewed as nothing other than a delaying tactic. I am unfortunately left with no choice but to conclude that your decision to propose a rule and delay the implementation of this important part of the JOBS Act is a reflection of your ideological opposition to a bipartisan effort by Congress and the President to improve the conditions for capital formation in the United States.”

Why delay? Is the SEC unwilling to implement the legislation? Given what we have seen so far with the changes to laws asking for investments from wealthy individuals, what does this mean for Title III of the JOBS Act that allows for crowdfund investing by the general public?

The SEC was given 270 days to make the rules related to how crowdfunding will operate. Since the bill was signed we have been included in several meetings with the SEC and industry participants, and during this time the SEC has been taking public comments. It has been very open to meeting with us and learning and understanding how to balance investor protection within the confines of the legislation. That’s why we are so confused by these latest actions.

Is there a concern we have yet to address? Will our economy ever see the jobs we need or will delays continue?  What do you, the entrepreneurs and investors who the bill was passed to help, think?

Jason Best and Sherwood Neiss led the U.S. fight to legalize debt and equity based crowdfunding, co-authored Crowdfund Investing for Dummies and founded Crowdfund Capital Advisors where they provide strategy and technology services those seeking to benefit from crowdfund investing. 

[Top image source: Rep. McHenry's website]

The first ever Crowdfunding Industry Report, from research firm Massolution, reveals that crowdfunding platforms, such as Kickstarter and Crowdfunder, raised $1.5 billion spread out over one million campaigns in 2011. Of that $1.5 billion, $837 million came from North American investors.

The Crowdfunding Industry Report examined four types of crowdfunding worldwide: equity-based, donation-based, lending-based, and reward-based.

Equity-based crowdfunding, in which funders get a stake in the company, raised the most money per campaign in 2011. This sector grew at 114 percent compound annual growth rate (CAGR). Donation-based crowdfunding projects, where contributions went towards a charitable cause, raised the most money overall, $676 million.

In North America the majority of crowdfunding was for reward-based projects, like those found on Kickstarter, where the investor receives a tangible item or service in return for their funds. Globally, there are more reward-based crowdfunding platforms than any of the other three types.

Crowdfunding is gaining traction as a viable way for startups to bypass venture capitalists and raise money from other sources. The high CAGR and large amounts of money raised per campaign for equity-based crowdfunding bode well for startups, according to the report.

Adding fuel to the fire is a shift in the legal climate. Crowdfunding from unaccredited investors was highly restricted prior to President Obama signing the JOBS Act in April, 2012. Under the new law, friends, family, and strangers can more easily use a crowdfunding platform to invest in a startup in return for shares of the company, and companies can have a higher total number of investors before triggering public disclosure regulations that would ordinarily impel companies to list their shares on a public market.

“Driven by equity-based and reward-based crowdfunding, our forecasts indicate total funds raised will nearly double this year. Additionally, the passing of the JOBS ACT will have a profound effect on the growth of crowdfunding in the U.S. In 2013, we expect securities-based crowdfunding to bring new sources of funding to many startups and early stage businesses,” said Carl Esposti, chief executive of Massolution in a statement.

However, 89 percent of investors reported participating in only one or two campaigns, which could affect the ongoing success of crowdfunding. Investors tend to return to the same crowdfunding platform they used previously, instead of branching out. It’s unclear if there is any sort of dissatisfaction with the crowdfunding process or if investors are simply putting larger sums of money towards one goal instead of spreading their wealth around.

At the end of April 2012, 452 crowdfunding platforms were operating around the world, according to Massolution. The research firm expects that number to rise to more than 530 by the end of 2012. You can read a copy of the report below.

 Hands holding up cash image via Shutterstock

The legislation, which is sweeping in nature, contains various provisions crafted to ease capital raising for privately-held companies. The provision that has generated perhaps the most buzz is a new securities exemption that allows companies to raise up to $1,000,000 per year from large numbers of investors through funding portals. The ability companies will have to crowdfund equity financing greatly expands their potential sources of capital. But startups will want to think carefully before taking the crowdfunding route.

Crowdfunding comes with some potential pitfalls. So if you are an entrepreneur forming a startup, you will want to map out your near-term and long-term financing strategies before you decide whether to go the more traditional route of friends and family and VC financing or to try crowdfunding. Here are a few points to keep in mind:

1. The crowdfunding provisions of the JOBS Act legislation include various requirements and complexities that your early-stage company must adhere to, including (a) specified disclosure obligations, (b) rules regarding which funding portals and brokers you can use in crowdfunding financings and (c) per-investor caps on investment amounts, which could prove difficult to navigate. The SEC will announce regulations to put the new law into effect in the next several months that could have a significant impact on the utility of the crowdfunding option.

2. It could cost you significant time and expense to do the administrative work associated with record-keeping and potential contractual arrangements with large numbers of stockholders. Further, a greater number of stockholders could translate into a greater number of disgruntled stockholders, further translating to more potential stockholder lawsuits. This in turn could lead to, among other bad things, higher directors liability insurance costs.

3. For the reasons I have described above, you might find it difficult to obtain venture capital once you have taken a round of crowdfunding, so it is likely crowdfunding will become an alternative route, rather than a stepping-stone, to venture capital financing. In short, if you are considering near-term crowdfunding, be aware that the transaction might foreclose venture capital investment down the road.

While venture capital financing is not without its limitations and disadvantages, there are also well-known benefits. Completing venture financing generally provides your company with such benefits as  (a) ready access to future financing from a well-funded and motivated source, (b) benefits of the business expertise and contacts (including with potential commercial lenders) of the venture investor, and (c) validation and credentialling from being financed by a sophisticated investor after it has completed due diligence (which can prove very important as the company moves to an initial public offering or a M&A exit).

More fundamentally, if your company needs money to fund operations greater than the $1,000,000 per year permitted under the JOBS Act crowdfunding law, you would be compelled to pursue the larger amounts available through venture capital.

We will likely see many early-stage companies using the crowdfunding option in the future. For some companies (in particular, those unable to get venture captial whether due to size, business sector, or geography), crowdfunding will make a great deal of sense. But it is less likely that crowdfunding will change the game plan for companies that would otherwise be able to secure venture capital financing.

Mark J. Mihanovic is a partner in the law firm of McDermott Will & Emery. He heads the firm’s California corporate practice and serves as corporate liaison partner in the firm’s strategic alliance with MWE China Law Offices based in Shanghai. His practice is primarily focused in the areas of corporate finance and mergers and acquisitions, with a particular emphasis on technology, life science, and health care companies.

Just a few years ago, may of the simplest online opportunities were still viable for new entrants with relatively little capital. Today, I see excessive competition everywhere I look, and nearly every niche seems to have at least 1 or 2 well-funded competitors. The other day I was joking with my wife about the issue, and we came up with a business idea (as a joke) that we thought would be a good litmus test — a dating CRM. Afterall, a busy dating pro needs to keep track of all their dates right? (joke). So we looked online, and to our horror, there were several, one of which appeared to be a serious product.

This kind of crowding isn’t what you want to see if you’re about to take a major career gamble.

So why has the market become so congested? Consider what has happened with venture capital investments in Internet startups. Only a decade ago, the expense of getting a startup off the ground was very high. With the cost of servers, and having to write all the low-level code from scratch, it was entirely likely to require millions of dollars to get a company off the ground. As hardware commoditized and foundational software became open source, the cost and time to get off the ground has reduced substantially. Investor Mark Suster wrote an interesting piece on this topic, suggesting that the capital cost of launching a new startup has gone from a million dollars to only $50,000.

I’ve heard it said anecdotally that only 1 in 1,000 Silicon Valley startups would be considered a “success” five years later. A little more promising, I also heard Founder Institute CEO Adeo Ressi indicate that startup success was closer to 3%. I don’t know what the actual number is, but this serves to illustrate just how high the risk is and why the lower cost of investment for VCs is such a good thing. Rather than spending a million dollars on a single business, you can spread that same million dollars across many young startups and significantly increase your odds of reaching positive ROI. That’s why we saw Y-Combinator launch a few years ago to provide early-stage mentorship and $20,000 of investment for college students who want to take a chance on a startup.

The Y­‐Combinator model has proven so successful that it has attracted much more money into the ecosystem and there has been an absolute explosion of startup accelerators across the country, all proliferating the same mentorship + seed capital model. The net result is that you have often multiple tech entrepreneurship factories churning 20-50 out cohorts of new startups every quarter.

With geek now being chic and success stories such as Facebook and Google inspiring movies and careers around the world, the allure of becoming a startup millionaire is today’s equivalent of becoming a rock star. And the Internet has torn down many physical barriers that once precluded other nations from competing. Now you see merchants selling directly from China on eBay, and SaaS companies providing compelling online software solutions directly from India and Eastern Europe. No wonder it feels so crowded!

But let’s focus back on the maturing of capital markets and their contribution to this phenomenon. In the traditional investing cycle, initially, a few investors would reluctantly invest a little money in a company that already had a proven model and track record. With a nearly guaranteed return on investment, they saw healthy returns and confidence built. In the next cycle, more investors observed this success and tried to step ahead of the conservative late-stage investors to get in on the easy money. They accepted more risk and lower returns. This process continued until we had a very mature market in which too much money was chasing too few ideas, all trying to step ahead of one another. And eventually we got to where we are today — money being thrown at every college kid with an idea and no track record. Now imagine what happens with the newly passed JOBS Act, that will make it easier for small businesses to attract angel funding from non-accredited investors, particularly through crowd-funding.

But everything goes in cycles, and I can’t help but wonder if this wave is already cresting. While there’s been opportunity for venture capital firms to spread their risk across numerous startups and increase their odds, doesn’t the proliferation of incubated startups actually challenge the success potential of each one of them? And how long does it take for the aggregate return-on-investment to once again find its historic equilibrium?

It was less than a decade ago that Wall Street was touting financial innovation and Congress was touting easy lending that would make it possible for more Americans to become homebuyers. This, of course, opened up capital to home buyers and investors that created the housing boom and eventual bust. But all it really did was bring more people into the market place and temporarily distort opportunities; a distortion resolved a few years later.

So how long will it take for this bubble to correct? As aggregate returns begin to marginalize and the over-supply of startups begin to cannibalize one another, other investment opportunities such as real estate may become more attractive again and provide healthier alternatives for the early ‘smart money’. The ultimate consequence is going to be a downward leg for a number of years for startups. It won’t be the end of the world, but it will mark the end of an easy-money cycle and a period of exaggerated perceived opportunity.

For would-be entrepreneurs looking to invest in a startup today, it may be worth taking a hard look at whether this is the best time to take the plunge. Isn’t it after all the height of a market cycle when the opportunity looks the best and when everyone is convinced that ‘things are different this time’?

Neal Cabage is a software developer and entrepreneur. He has previously created and sold two startups and is currently the founder of Enlogica, a web and mobile consultancy, which has helped enterprise and startup clients alike in the development of interactive media and software.

[Top image credit: xavier gallego morell/Shutterstock]

Barnett has been on Bloomberg TV and TechCrunch arguing the merits of the new bill. He said more than $15 million in funding has been waiting on the sidelines that will be invested in over 1000 companies now that this bill has become law. And, like many proponents of the JOBS Bill, Barnett believes it’s a good thing that less wealthy Americans who don’t qualify as accredited investors will now be able to put their money into young businesses and reap the rewards.

But before you plow your retirement fund into sleep masks to enable lucid dreaming or prototype Space Shuttle replacements, hold up a second. The Crowdfunder infographic claims that of the more than $430 million dollars invested in Kickstarter, CrowdCube, and Prosper, there have been zero cases of fraud. While we don’t know of any official fraud cases brought against Kickstarter backers by law enforcement, we would like to take issue with that figure.

Adrianne Jeffries at Betabeat has reported on two separate Kickstarter projects that drew allegations of fraud. Backers put $27,000 into the Tech-Sync Power System before the project was mysteriously cancelled after failing to explain how it could deliver on its promise.

Perhaps more striking is the case of Vere Sandals. The project was successfully funded more than one year ago, on March, 1 2011, raising $56,618 from 1,091 backers. Just five hours ago, frustrated backers were still leaving comments on the project page asking why they had not received their sandals. More infuriating to those who pledged money is that Vere Sandals has begun retail operations, selling shoes directly to merchants, without first completing its commitment to its Kickstarter backers.

“Over a year ago I backed a new company — Vere Sandal Co. — that wanted to get in business. Never had I anticipated that using the backer’s money to finance retail business would be the result,” wrote backer Rajesh Patel. 

“That they were shipping to retailers even as they were making excuses to backers just makes a bad situation worse. Personally I don’t expect I’ll be seeing the sandals, getting my money back or even hearing from these folks. They have made clear how they do things and it is merely a case of ‘backer beware’,” wrote Dan Cohen.

“How can you ship to retailers before the people who backed you over a year ago? This company is a total scam and I want my investment back!” wrote Adam Browning.

There was never an official contract between the backers and Vere Sandals. As Kickstarter’s terms of service make clear, “Kickstarter is not liable for any damages or loss incurred related to rewards or any other use of the Service. All dealings are solely between Users. Kickstarter is under no obligation to become involved in disputes between any Users, or between Users and any third party.”

[Update: VereSandal has responded to the original story at BetaBeat, with an explanation for the delays. It points to mechanical, sewing machine, and other frustrations that delayed the project. So on the face of it, the delays appear to stem from mere execution issues, rather than efforts to defraud.]

Hopefully, crowdfunding portals will be responsible stewards for investors’ money and the result will be a boom in small business creation. But clearly, some ordinary people who put their money into crowdfunded projects haven’t seen the return they were promised.

Have you been disappointed by a crowdfunding investment? Know of any examples of crowdfunding fraud? Email us and let us know.

President Obama is expected to sign the JOBS Act into law tomorrow — a piece of legislation that allows small businesses to receive investments via crowdfunding. This Act will benefit investors by providing a new source of portfolio diversification and potentially strong returns. It will also benefit startups and small businesses by opening up a much needed source of financing. While crowdfunding holds promise for many different industries, there are three reasons why investors should look closely at consumer-related companies in particular:

1. An Unsaturated Market. Few capital sources exist for sub-$10 million consumer products businesses. Historically, venture capitalists and angels have focused their attention (although not exclusively, of course) on high tech companies in Silicon Valley and Boston. Private equity firms tend to fund in the consumer industry, but only larger companies because of the amount of capital they need to invest in an average deal. Because of this, emerging consumer products companies have difficulty obtaining growth capital, even if they are promising investments on an individual basis.

Equity based crowdfunding fills this void uniquely. The crowd brings in new investors with a wider range of knowledge and expertise that is uniquely relevant for consumer companies.  The crowdfunding model makes the investments lower cost, and more flexible for capital raises in the critical ‘growth gap’ of companies with less than $10 million in revenue.

2. The crowd understands consumer products best. Professional investors will tell you the most important part of their job is due diligence, the process where investors look beneath the hood of a company — analyzing business plans, financials, products, markets, organization, legal issues, and a host of other items — before they invest in a business. It will be extremely hard for the “crowd” to conduct adequate due diligence on high tech businesses. Often, the most valuable assets for start-up high tech businesses are the companies’ engineers, and it would be extremely difficult for a group of 50 investors making a crowdfunding investment to diligence the engineering talent and understand the technological viability of their idea.

The consumer products industry, however, lends itself to a consumer’s diligence (and, therefore, the diligence of the “crowd”). A consumer product company’s most valuable asset is often its brand. Investors can easily walk into a grocery store or talk to colleagues and friends to diligence a skincare product — these are the exact same diligence techniques institutional investors in these companies use. Also, there is a great deal of data, such as retail-level sales, available from sources like SPINS and AC Nielsen that allow investors to objectively track the performance of small consumer companies. The fact that the “crowd” is comprised of consumers is important.

3. Consumer product companies are efficient users of funding. Consumer products companies are often cash flow positive very early on and require minimal startup capital. New consumer companies can outsource production, and it only takes one salesperson (usually the founder) to land distribution in Walmart and the millions of dollars in cash flow that come with it. In my previous job as a private equity investor focused on consumer products companies with over $10 million in revenue, almost none of our investments needed multiple financing rounds to get off the ground. Once growing, the path to exit – either through private equity or a strategic acquisition – is more straightforward than in other industries.

Crowdfunding is only beginning. Over time, it will grow into a significant channel for investors to invest in private companies in a range of different industries and growth stages. Consumer oriented businesses are the right place for this novel concept to grow, since the “crowds” of crowdfunding are the consumers who – by their market selections – choose and produce the companies that succeed.

Ryan Caldbeck is a crowdfunding entrepreneur and former private equity investor who spent seven years in private equity at Encore Consumer Capital and TSG Consumer Partners. He is also founder and CEO of CircleUp.com, an equity-based crowdfunding platform focused on established high-growth consumer and retail companies.

[Top photo credit:  Dmitrijs Dmitrijevs/Shutterstock]

A piece of legislation designed to make crowdfunding a legal option for startups will be passed into law as President Barack Obama plans to sign the JOBS Act Thursday, VentureBeat has confirmed.

The Jumpstart Our Business Startups (JOBS) Act has already successfully made its way through the U.S. Senate and the House of Representatives, with some modifications, and will allow startups raising $1 million or less to let regular Joes and Janes (read: non-accredited investors) purchase a limited amount of equity in their nascent businesses via approved portals.

The legislation also eliminates the 500-sharehoulder rule, meaning that startups can wait longer before needing to publicly report financial data to the SEC and hold off on forced public offerings.

“On Thursday, the President will sign the Jobs Act,” press deputy secretary Josh Earnest said in a press gaggle on Friday.

News of the JOBS Act imminent approval started spreading on Twitter Saturday afternoon when Aol co-founder, Revolution CEO, and JOBS Act proponent Steve Case tweeted the revelation.

The entrepreneur-friendly initiative flew through the Senate with a 73 to 26 passing vote, and the revised law passed in the House with a 380 to 41 overwhelming majority. The legislation, popular with Democratic and Republican political parties alike, was already known to be supported by the White House and President Obama.

“The JOBS Act will help revitalize an IPO market that has suffered in recent years under the weight of market volatility and one-size-fits-all regulation,” Highland Capital general partner and National Venture Capital Association chair Paul Maeder said in a previous statement. “The passage of this legislation sends a strong and welcome signal to our most promising companies that the U.S. capital markets system is open for business.”

---

Big Data and Predictive/Real-time Analytics startups: Are you looking to jumpstart development & accelerate market traction? Sign up for the SAP Startup Focus program to receive technology, support, resources and community to help you develop new applications on SAP HANA, a cutting edge database platform. Get started here, and enter promo code “VB2013″ on the form.

---

The JOBS Act, a piece of legislation designed to make crowdfunding a viable option for startups, has passed the U.S. House of Representatives and now awaits President Obama’s vote.

The JOBS (Jumpstart Our Business Startups) Act first came up for a House vote earlier this month. The bill proposed that startups raising $1 million or less be able to let anyone buy up to $10,000 (or 10 percent of the annual income, whichever is less) in equity.

The bill removed the 500-shareholder rule, which states that any company with 500 shareholders or more must publicly report financial data to the SEC. The new legislation lifts that limit to 1,000 individual investors. The JOBS Act would also give non-accredited investors an easy path to becoming early shareholders in startup companies.

After a brief sojourn in the U.S. Senate last week, the Act was modified to include protections for these less sophisticated or experienced investors. Individuals who want to buy equity in new, privately held companies will have to do so through approved channels. Also the amount each individual can invest was capped on an income-based sliding scale, with limits ranging from $2,000 to $10,000 dollars.

The bipartisan legislation is already strongly backed by the White House and has support from both major political parties. The JOBS Act passed in the Senate with a 73-26 vote, and the revised bill passed in the House with a 380-41 landslide.

“Bipartisan action on important innovation issues like the JOBS Act shows the American people that Congress and the President can find ways to work together for the better good of the country, even in an election year,” said Timothy Tardibono, Washington D.C. office director for tech and science network Connect.org, in a statement issued this morning.

“Emerging growth companies represent America’s best opportunity for long term economic growth and it is critical that they have access to capital at all phases of their lifecycle,” said Paul Maeder, general partner at Highland Capital Partners and chair of the National Venture Capital Association in a statement today. “The JOBS Act will help revitalize an IPO market that has suffered in recent years under the weight of market volatility and one-size-fits-all regulation. The passage of this legislation sends a strong and welcome signal to our most promising companies that the U.S. capital markets system is open for business.”

Image courtesy of The White House, Flickr

Crowdfunding bill passes in the Senate

First up, we have some news that affects the future of startup funding in the United States. Today, with a 73-26 vote, the Senate passed the JOBS Act, which allows startup entrepreneurs to get funding for their businesses from basically anyone, not just registered investors. The bill included a stipulation that money can only be invested through approved portals, a new rule that is meant to protect the investors. Each investor also has a cap on how much they can invest based on their income. The JOBS Act passed in the House earlier this month.

Freelance-work service oDesk grabbed $15 million

Outsourcing service oDesk, which brokers jobs between freelance workers and businesses looking to outsource, announced today it has raised $15 million in its fourth round of funding. oDesk connects freelance contract workers with businesses that want to outsource hourly jobs. The round was led by Henry Ellenbogen of T. Rowe Price, Benchmark Capital, Globespan Venture Partners, and Sigma Partners.

Path may have grabbed some fresh cash

Rumors were flying today that Path, a social network for people who want their social networks to be only 150 strong, raised $20 million in new funding. Our Path sources claimed it was indeed just a rumor, but we’re still keeping out eyes out for signs that it could be true. The round was reportedly led by Redpoint Ventures and pegged Path at a $250 million valuation.

Voice recognition service OneTok raises $1.5 million

OneTok wants to bring Siri-like voice recognition to other applications and the web, so we can control much more with our voices. The company announced a $1.5 million first round of funding, according to an SEC form D filing, BetaBeat reported. The money came from an unnamed New York venture capital firm and friends and family.

Social casino-game studio Plumbee cashes in with $2.8M round

In the wake of Zynga buying OMGPOP Wednesday, another game studio emerged from stealth mode and announced a round of funding. Plumbee, which makes social casino-themed games, raised $2.8 million from Idinvest Partners, reported The Next Web. Plumbee also launched its first game, Mirrorball Slots, Thursday on Facebook. Who knows, maybe it’ll be the next game studio to get gobbled up by Zynga.

Have funding news for VentureBeat? Drop us a line at tips@venturebeat.com. 

Piggy bank image via Shutterstock

In the Senate version, crowds looking to fund new business ideas will have to do so through approved portals, many of which have been been gearing up to funnel cash into new companies once this law is fully passed. Companies can receive up to $1 million in funding from the crowd, with the amount each person can give being capped based on their income. The limits range between $2,000 and $10,000 dollars.

But not everyone is convinced the JOBS Act is for the best. David Marlett from Crowd9, which works with crowdfunded securities, still sees a lot of room for fraud.

“Regardless of how this is stated, it will be almost impossible to enforce.  If an investor wants to invest, they will simply claim their income or net worth to be above the required threshold,” he writes on his blog. “Spend time in the boiler rooms, listening to the schemes, trying to counsel against those exhaustively exaggerated claims, and you get a sense for how truly ineffective such a provision will be. Once a potential investor is spotted, any huckster worth his huckst will make sure they ‘meet’ whatever threshold is required.”

Marlett also talks about the absurdity of performing financial audits on newborn companies who might spend as little as a few hundred dollars on each line item involved in forming a startup.

A number of other important provisions in the legislation will dramatically impact the startup landscape. The biggest one is probably the death of the 500-shareholder rule, which will allow private companies far more leeway to put their shares onto platforms like SecondMarket, giving the company, especially early investors and employees, much needed liquidity without the major hurdle of having to take the company public.

Contemplating expanding your business to Asia? Sign up for a free VB webinar this Thursday 3/22 at 1pm PT. You’ll benefit from actionable tips and lessons learned as VB Executive Editor Dylan Tweney moderates a lively discussion with a group of Silicon Valley CEOs about their experience in using Singapore as a hub for Asian expansion. There will also be an attendee Q&A portion directly following the session. For full details, go here.

Right now, it’s illegal for a startup to solicit investors on platforms like Twitter or Kickstarter. But the JOBS Act would change that. For startups raising $1 million or less, anyone can now buy up to $10,000 or 10 percent of the annual income (whichever is less) in equity. (Anyone who wants to get in on the ground floor of my bonsai pets business, send your checks to WeWork Midtown, care of VentureBeat.)

One of the principle drivers behind the IPO filings of Facebook and Zynga was the 500-shareholder rule, a vestige of the Securities and Exchange Act of 1934, which said that any company with more than 500 shareholders has to open its financials to the SEC like a public company. But under the JOBS Act, anyone who gives $10,000 or less will not count toward this limit. The act also raises the shareholder limit from 500 to 1,000.

Startups can opt to raise as much as $2 million in this manner; but if they go the crowdfunding route, they will have to provide audited financial statements to their investors. And while raising capital from the crowd is pretty nifty on Kickstarter, it has some drawbacks for startups. Here are some highlights from our FAQ on crowdfunding:

First, startups must understand that minority stockholders have certain significant rights under state law, including voting rights, the right to inspect the company’s books and records, the right to bring a derivative claim on behalf of the company, and certain protections against oppression by the controlling stockholders. Indeed, the more stockholders a startup has, the greater the likelihood that a disgruntled stockholder will cause problems, including filing lawsuits.

Second, having hundreds of stockholders is an administrative nightmare and will be time consuming and costly. Presumably, each stockholder will be required to execute a subscription agreement and/or stockholders’ agreement to address key issues such as transfer restrictions, rights of first refusal, and drag-along rights. There will also be administrative issues relating to voting and stock transfer issues.

Third, startups will likely have difficulty raising funds from VCs and other sophisticated investors if they have hundreds of unsophisticated stockholders. Needless to say, few sophisticated investors will want to sit on the board of directors of such a company due to the risks of lawsuits relating to director liability, and I would assume D&O liability insurance rates will skyrocket for these companies.

The JOBS Act also makes it easier for small companies to go public by increasing the offering threshold for companies exemepted from SEC regulation from $5 to $50 million on companies. Additional regulations will be phased in over a five-year period for companies that stay under $1 billion in revenue.

This is a huge win for companies like SecondMarket. Companies can now stay private with twice as many investors and go public with a much smaller revenue stream. That will mean big growth in the small and medium cap IPOs that SecondMarket is counting on to replace the revenue it is losing when Facebook goes public.