The Promise of Crowdfunding for Social Enterprise

Earlier this month, the White House hosted a briefing for the American Sustainable Business Council, a national network serving social enterprises from early-stage startups to established success stories, like Patagonia and Ben & Jerry’s.  Senior White House staff took time to meet with chief executives and thought leaders, such as Seventh Generation founder Jeffrey Hollender and Stonyfield Farms pioneer Gary Hirshberg, to discuss many aspects of the President’s agenda to support overall economic growth, including the Impact Economy. 

As part of the conversation, the discussion focused on the Jumpstart Our Business Startups (JOBS) Act.  The JOBS Act is a bipartisan bill signed by the President into law in April that will allow small businesses and startups to raise capital from investors more efficiently, leading to faster growth and hiring. 

One of the key features of the JOBS Act is to enable “crowdfunding” – letting companies raise up to $1 million in small increments from many investors.  As the President said, this is “a potential game changer”:

Right now, you can only turn to a limited group of investors -- including banks and wealthy individuals -- to get funding.  Laws that are nearly eight decades old make it impossible for others to invest.  But a lot has changed in 80 years, and it’s time our laws did as well.  Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors -- namely, the American people.  For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.

In many ways, nonprofits and social enterprises are already adept at raising money through crowdfunding – think of donation-based tools like Network for Good or zero-interest microfinance platforms like Kiva.  What the JOBS Act will do is allow micro-investors to purchase a stake in the venture.

Many social enterprises already have benefited from donation-based crowdfunding platforms, and they are looking forward this new opportunity to attract impact-minded investors.  Two such companies guest-posted on the White House blog, and their founders attended the JOBS Act signing ceremony:  Stockbox Grocers builds tiny grocery stores in urban “food deserts,” while LuminAID Lab manufactures solar-powered lights for disaster relief.  Both companies stress the power of crowdfunding to connect social enterprises with their communities and customers.

At a time when nonprofits are struggling for revenue, as charitable donations have slowed and government budgets are tight, the social sector needs to find new strategies to attract resources.  The Obama Administration has taken some important steps toward this end, developing policies and programs to unlock capital and to increase investment.  For example, the Administration launched the Social Innovation Fund to provide growth capital to high impact nonprofits. In two years, it has catalyzed nearly $400 million toward communities’ solutions. The Treasury Department recently updated the example Program Related Investments, providing guidance that should facilitate the flow of impact investing from foundations and philanthropists to support businesses and nonprofits pursuing charitable purposes.

Building on this momentum, crowdfunding offers tremendous promise.  Some believe that it has the potential to revitalize underserved communities by improving access to capital for small businesses.  As the leader of a major group representing Main Street microenterprises recently wrote, “Given the tremendous demand for credit among microbusinesses and entrepreneurs, crowdfunding offers real promise for underserved business entrepreneurs and may allow the organizations that serve them the ability to reach even deeper into the entrepreneurial community.”

To be clear, investment-based crowdfunding is not legal just yet. Congress required the Securities and Exchange Commission (SEC) to write new rules of the road for crowdfunding, which will be finalized in 2013. Some open questions include the following:

• Any company raising money through crowdfunding must use an SEC-regulated intermediary.  How should these intermediaries be required to educate investors, safeguard investor privacy, reduce the risk of fraud, and ensure other investor protections?
• In any given year, investors are limited in the total amount they can invest across all crowdfunding investments (5% of annual income or net worth if less than $100,000, or 10% of annual income or net worth if greater than $100,000).  How should intermediaries be required to verify that investors stay within these limits?
• What disclosures should be required of the companies raising money through crowdfunding, above and beyond those spelled out by Congress?

The SEC has invited members of the public to submit comments to inform their rulemaking.  These comments could include considerations unique to social enterprises, along with those investors willing to trade some financial return for greater social or environmental benefits.

To provide comments on crowdfunding, read the JOBS Act and visit the SEC comment page.

Doug Rand is a Senior Policy Advisor in the White House Office of Science and Technology Policy.