SEC Crowdfunding Rules Pose Challenges, Create Opportunities

October 2, 2014       Julius A. Karash      

At first glance, the Securities and Exchange Commission’s (SEC) proposed rules on crowdfunding don’t appear to have much to do with the nonprofit world. The rules are designed to make it easier for small businesses and startups to raise capital and provide additional opportunities for investors.

Experts agree that nonprofits would not be directly affected by the SEC rules, note an emphasis on directly. “It wouldn’t impact the way nonprofits raise money, because crowdfunding as described by the SEC applies to what we traditionally think of as investments,” said Miriam Ka­gan, senior principal at Kimbia, an online fundraising platform and service provider in Austin, Texas. “With a charitable donation, there’s no expectation that you, the donor, will be getting some sort of return, other than perhaps a story about how you made an impact.”

But in an era when technology is forging ever-closer capital raising connections, there is a consensus that non­profits and for-profits do not operate in isolation from each other and can impact each other in a variety of ways — and even learn from each other.

“I think it’s a good inflection point for nonprofits to go out and take a look and see what their for-profit brothers and sisters are going to do with this, and how it reflects into the nonprofit world, said David J. Neff, author and consultant to nonprofits, also in Austin, Texas.

Online crowdfunding — also known as crowdsourcing — gained traction during the early 2000s with platforms such as Kickstarter, which raises money to finance creative projects. Congress in 2012 created an exemption to allow businesses to offer and sell securities via crowdfunding. Title III of the Jumpstart Our Business Startups (JOBS) Act laid the groundwork for a regulatory structure for this, and the SEC was directed to write the rules.

Neff said for-profit crowdfunding might generate more competition for crowdfunded dollars sought by nonprofits. “At the end of the day, am I going to give to a nonprofit with the limited money I have in my wallet, or am I going to give it to my friend who’s opening a hair salon or a candy store?”

Neff thinks implementation of the SEC rules would raise public awareness and generate positive attention around crowdfunding overall, and thereby create opportunities for nonprofits.

“If you worked in a nonprofit, you could highlight this as a further legitimization of crowdfunding, and use it as a point to talk to your board, or your vice president of fundraising, or your executive director,” Neff said. “You could say, ‘I’m really interested in this for an upcoming campaign. It’s becoming more and more a legitimate way of raising funds. I’d like to go do research to see how this would affect our nonprofit.’”

Ryan Rutan, founding partner of the Fundable.com platform, agreed that nonprofits stand to benefit from the SEC rulemaking. “It will have a good impact on the nonprofit sector. As we expand this model of funding, and it becomes more common and people are more exposed to it on a wider level, it will become more accepted, and people won’t think twice about opening their wallets to these kinds of things.”

At crowdfunding site Indiegogo, Co-Founder and Chief Development Officer Danae Ringelmann said she and her colleagues are excited about the prospect of for-profit businesses opening up crowdfunding to wider participation. “While nonprofits will not be directly impacted by equity crowdfunding, the new-found ability for regular people (not just high net worth individuals) to invest into projects small and large with a chance of financial return, will strengthen society’s view of and comfort-level with collective capital as a vehicle for sustainable and community-driven change,” she said.

Kagan noted that many of the SEC’s proposed rules focus on transparency and clarity in crowdfunding transactions. As examples, companies that conduct a crowdfunding offering would be required to disclose a description of the company’s business and use of the proceeds, and a description of the company’s financial condition.

“Crowdfunding has become a confusing term,” Kagan said. “Hopefully, having some guidance from the SEC around the commercial side of this will force a lot more transparency in general in the market, and point the way to go for nonprofits.”

Regardless of what the SEC does, nonprofits should “focus on how they can provide clearer options to supporters, through either home-grown platforms or platforms that give them a lot more control over their message, over how money is raised, over data,” Kagan said.

Dana Ostomel, founder and CEO of DepositaGift.com, a crowdfunding website for personal and organizational fundraising, said nonprofits should “ride the wave of awareness” being generated by the SEC rules. “Now is the time to take advantage of this type of resource, when crowdfunding is being seeded into the awareness of the global populace because of the high-profile nature of the SEC rules, and use this as an opportunity to distinguish themselves from other types of crowdfunding campaigns, especially other types of charitable good campaigns.” NPT

Julius A. Karash is freelance business writer based in Kansas City, Mo.

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