Further to our earlier discussion of crowdfunding in Georgia, PayPal recently announced on its blog that it is overhauling its policies with regard to the use of the PayPal gateway by crowdfunders in light of “unique regulatory and risk aspects inherent to this new way to raise money from supporters around the world.”
PayPal’s VP of Risk Management, Tom Barel, does not call out crowdfunding sites by name but seems to want to suggest that fools rush in where angels fear to tread, warning that the crowdfunding model is it is “potentially open to abuse” and that PayPal does not want to have to explain to customers where their money went if someone soliciting funds from the “crowd” does not fulfill its promises, at least while the regulatory waters are still murky,
Barel, while describing crowdfunding as on the one hand “pretty complicated” and inherently risky, at the same time acknowledges that the widespread public ability to invest in startups may be a “powerful catalyst for innovation.” As a risk manager, perhaps his job is to let PayPal have it both ways, though some have seen the announcement as damage control following PayPal’s recent about-face when it froze and then just as quickly released Nyu Media’s funds for the video game Yatagarasu Attack on Cataclysm. Hat Tip to Eric Johnson of AllThingsD.
While crowdfunding by the general public is quite legal in certain other advanced economies (e.g., the UK and Australia), the Securities and Exchange Commission has been slow to permit US businesses to move from currently permitted reward/donation crowdfunding (where “investors” get a t-shirt or the warm fuzzy feeling of having supported a worthy cause, a scientific experiment, or a local band’s new album) to true equity funding (where investors actually own a stake in the startup venture and gain or lose cold hard cash depending on how well the business does).
So what’s the holdup? Equity crowdfunding rules that the SEC was required to finalize by December 31, 2012 have still to go into effect. These rules would permit an exemption to the 1933 Securities Act that is necessary to open the way for public advertisement and sale of certain securities to non-accredited investors (basically those of us who make $200,000 or less per year and have less than $1M in net worth). Such sales, of course, would be subject to certain oversight and restrictions… and there’s the rub.
Nonetheless, SEC Chair Mary Jo White has promised that the rules are on the front burner, and says, “I define the front burner to be sometime into the fall.” Well, fall is less than a week away now, so watch this space… or just listen for the whoosh as the many small-budget angels finally enter the market.