The New Law That Will Turn the Start-Up World Upside Down: Crowdfunding

Remember that special moment when we all realized that the Web was going to remake yard sales and auctions, but we didn’t know yet who was going to win? (And then eBay left the rest in the dust?)

Such a moment has come again, and with a choice prize: Investing in start-ups. The House has already passed crowdfunding legislation, by a whopping majority. The president supports it. Senators on both sides of the aisle (Merkley, Bennet, and Brown) have agreed on a version. Entrepreneurs are signing petitions to support it. And there is speculation that the Senate Majority Leader Harry Reid may push for passage of the House bill as-is. This could be law overnight.

What would this mean? It would mean start-ups can “go public” from the get-go. Fasten your seatbelts. This is Kickstarter on jet fuel. Under the House rules, any start-up can publicly announce that it’s raising capital (on Facebook, or even in the local paper), and can raise up to $1M each year. That’s enough for lean start-ups to go many times around the track. Individual investors can invest up to 10 percent of their income. And there is very little paperwork required.

Everybody likes the innovation and jobs that this could propel. Detractors are understandably concerned about fraud.

Here’s how this is going to play out: Intermediaries (the future eBays of this space) will spring forward to handle the paperwork, do background checks on issuers (required), ensure that offerings are well described and enforce balanced investment terms. The House version allows start-ups to do this without an intermediary, but that’s not going to happen in practice (it would be like trying to sell your item on the Web without eBay). And fraud? Crowdfunding is already legal in the U.K. The leader there, Crowdcube, is reporting zero fraud. U.S. crowd-lending site Prosper.com and accredited-investor-only U.S. crowdfunding site AngelList also report zero fraud. Lots of data here for the curious.

This could be big. “Locavesting” author Amy Cortese points out that if Americans diverted one percent of their long-term savings to this kind of investment, that sum would be 10 times the total annual VC investment in the U.S.

Up next? The race to be the eBay of this space.

Tim Rowe is the founder and CEO of Cambridge Innovation Center, which houses approximately 450 start-up companies in a large office tower in Kendall Square, Cambridge, Massachusetts. More than $1.5B dollars have been invested in these companies to date, and CIC has been a launch pad for several well-known companies, including Google Android and Great Point Energy.