Los Angeles Business Journal

SXSW: L.A. Entrepreneur Discusses Future of Crowdfunding

By Natalie Jarvey Tuesday, March 12, 2013

The investment community is moving toward a new age of funding that will give small businesses access to more capital than ever before, entrepreneur Chance Barnett told a small crowd of attendees at the South by Southwest conference on Tuesday.

Barnett led a talk at the Hilton hotel in downtown Austin, Texas, about whether highly anticipated changes to investment regulations will live up to the challenge of funding more small businesses and creating jobs. As the chief executive of Crowdfunder, a Venice company that seeks to help businesses sell stock over the Internet in exchange for financing, Barnett is bullish on the future of crowdfunding opportunities.

“What’s going to be created here is an entirely new capital market,” Barnett told the crowd. “We’re talking in just one fell swoop, creating the potential for something that’s 10 times larger than the current venture capital market.”

Barnett was speaking about the Jumpstart Our Business Startups Act, federal legislation that allows startups to publicly announce fundraising efforts and promote their campaigns to a wider audience. The act, which President Barack Obama signed into law in April last year, also lowers the barrier of entry for accredited investors in private companies. Previously an investor needed a net worth of $1 million or an annual income of more than $200,000.

The Securities and Exchange Commission was given 270 days to finalize the rules on how companies and investors will take part in crowdfunding. That deadline came and went in late December, however, without any action from the SEC.

While the delay is troubling to some in the crowdfunding space, Barnett said he expects to see most rules in place by the end of the year.

Until the SEC puts rules in place, crowdfunding companies are not able to facilitate the exchange of money for equity. Instead, crowdfunding is primarily used for donating to non-profits or creative projects, oftentimes in exchange for products or services. Many funding campaigns on Kickstarter, for example, offer a copy of a completed movie or a T-shirt as a thank you for donations.

During his talk, Barnett referred to such donation-based crowdfunding platforms as “crowdfunding 1.0.” He said the next step in crowdfunding is getting everyday people investing in local small businesses.

“This crowdfunding 2.0 world is not just about donating,” he said. “It’s about helping people and communities. There’s a significant funding gap for small-business entrepreneurs outside of Silicon Valley. This is something that I see crowdfunding investments solving.”

Barnett conceded that there will be some challenges in setting up a crowdfunding ecosystem. It might be difficult to teach everyday people how to think like investors and vet funding opportunities in the same way that VCs might. Furthermore, it could take a while until communities build up networks of small investors that are able to make a difference on a large scale.

“What you have to work toward is how to engage the larger community of people,” he said. “It’s going to take a while. Slowly but surely these networks will grow. That’s going to be the most transformative area of crowdfunding investing.”