Crowdfunding: Sustainable Investment Mechanism for Smaller Companies?

By November 10, 2011

The United States House of Representatives has just voted in favour of a bill which would make it legal to raise funds on collaborative investment websites. This mechanism could be a real boon for small businesses that have difficulty finding investors.

What is being termed “crowdfunding” could soon become one of the standard range of recognised models for funding businesses. The US House of Representatives has given its overwhelming support to clauses which would enable small and medium-sized companies to raise up to $5 million in capital from aggregated investment mechanisms via the Internet. Backed by President Barack Obama and tipped to receive the final approval of the Senate, the bill is likely to help foster companies trying to bring innovative ideas to market without having to go through the more traditional funding channels, which are subject to Securities and Exchange Commission (SEC) regulations, involving potentially lengthy procedures and onerous tax rules.  This model could also catch on in markets other than the United States. Alexandre Boucherot, co-founder of Ulule, a crowdfunding platform, explained in an interview with L'Atelier: "The European Commission is beginning to get interested in this idea. They’ve noted the success achieved in financing projects in the world of arts and culture and they would like to see the concept taken to the next stage."

Backing profitable business or promoting pet projects

Collaborative investing could basically work for two sorts of company. First and foremost are those companies with an innovative, and potentially profitable, business model – typically startups that are just getting off the ground – enabling the online investors who back the project to obtain sizeable and quick returns on their outlay.  The other category, suggests Alexandre Boucherot, would be those "love-at-first-sight projects that inspire people, projects that promote a cause people are keen to support – socially-oriented business, sustainable development schemes, etc."  However, if crowdfunding is to enter the mainstream a number of things will need to happen – its legal status must be properly clarified and all similar platforms made subject to the same legislation to ensure that this approach to financing enjoys full credibility.

Clear legislation and light tax regime a must

The tax regime is not something to be ignored either. "Those injecting capital want to be sure that the full amount is going to fund the company. They need to be sure that the authorities are not going to impose disproportionate tax rates," stresses Alix Heuer, Community Manager at Ulule.  Tax breaks, similar to those available in France for instance for financing Small and Medium-Sized Enterprises, could help to promote the take-off of this model, which so far has received very little coverage by the news media. "Lots of people would like to get involved in this type of project, but they don’t know who to turn to and they’re not aware of all their options. Some clear legislation would help to solve this problem. Anyway, there is certainly a demand for simple, transparent platforms," concludes Alexandre Boucherot.

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