[Originally published in the MAKE: blog, 14 Mar 2012]
First, the news; then some background. A bill legalizing crowdfunded investments was introduced into the Senate yesterday, sponsored by both Democratic and Republican senators. A similar bill already passed the House overwhelmingly (twice, actually), and the White House supports the idea and says that the President is ready to sign. So the Senate was effectively the last stop. Now it looks likely that this will become law, after the House and Senate versions are reconciled. Then it will presumably be kicked over to the SEC for details and implementation.
This is huge news for makers. Phil Torrone argued here last October that Open Source Hardware is Kickstarting Kickstarter, and it’s hard not to notice that the most successful crowdfunding raises, in terms of raw dollar amounts, are almost always geek-oriented — from last week’s 3.3 million dollar raise for the game Double Fine Adventure on down. Sure, filmmakers, artists, activists, and others benefit from crowdfunding, but it’s the (frequently open-source) hardware and software projects that really take off.
To keep it legal, contributors can’t be investors — they can receive perks like credits or gifts based on how much they contribute, and fundraisers frequently offer advance sale of items not yet produced. But advance sales may be illegal, particularly when any “donors” reside in states like California, which have a broader definition of “securities” than federal law. California law has one case (Silver Hills Country Club v. Sobieski, 1961) where someone tried to fund the building of a country club by selling memberships in advance. The state securities board shut them down, and it stuck, because this was considered a security. This case looks like a clear precedent (and Profounder shut down recently for violation of securities laws), but as far as I know, Kickstarter, IndieGoGo, and RocketHub haven’t been challenged on this yet.
This new legislation will change all of that by allowing makers to offer a genuine piece of the action to people invest in them. Want to take off a few months to pursue some idea you have? Do others believe that you’re onto something? Then they can become invested in the project– not just financially but intellectually and emotionally, to help you all succeed.
Opponents rightly warn about opportunities for fraud, but crowdfunding would make a tough con, because it all takes place out in the open, and would-be investors can communicate with each other and verify any claims collaboratively via their own research. In an interesting recent discussion on the Kaufmann Foundation’s Growthology blog, Robert Litan notes that in the early days of Ebay, skeptics thought it would soon be overrun with scammers, but clearly it was well designed to prevent this. In response, Tim Rowe notes that crowdfunded securities are already legal in some other countries, and so far, no fraud has ever taken place on these foreign crowdfunding sites.
To this, I would just add a citation to the only case of attempted CF fraud in the U.S. that I know of– the Tech-Sync Power System on Kickstarter. Here is the full story, from Andy Geime’s Geekscape blog, but to sum it up, someone made some semi-plausible technical claims and raised advance-sale money, but as people looked into it and discussed, they realized something wasn’t right. They started asking questions, the offeror went AWOL, and no one lost a dime.