There was a great hoopla and clapping of hands when President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law back in 2012. One of the major planks of the financial reform bill was to provide a mechanism to legally enable “crowdsourcing”. Crowdsourcing is where a group of people each contribute a relatively small amount of seed capital to fund a new startup business. U.S. securities regulations did not allow for real investor crowdsourcing until the passage of the JOBS Act, and the small business community was excited about a new way to raise capital.

Unfortunately, the SEC took almost 18 months to promulgate the regulations pertaining to crowdsourcing, so the legal framework for crowdsourcing campaigns has just been in place for a few months now. Furthermore, a new special report from Prequin suggests things seem to be off to a slow start, with the large majority of fund managers expressing reservations about crowdsourcing campaigns.

New regulations regarding advertising

Up until now, investment managers could only market new offerings to “qualified investors” (ie, wealthy individuals), which meant a relatively small pool of potential investors. The new SEC regulations allow investment managers to advertise and perform general solicitations, including posting private offering documentation on their websites for public viewing, which they were not able to do in the past. This means that funds can now directly market to the general public, setting up crowdsourcing campaigns where small retail investors can put up as little as a few hundred dollars to get in on their neighbor’s or their grandson’s new startup or their favorite director’s new movie.

Kickstarter and other current crowdsourcing platforms

Kickstarter and several other crowdsourcing platforms are currently in operation, but “backers” of projects could only receive token return for their investments (products, T-shirts, etc.) until these new SEC regulations recently took effect.

Fund managers conservative and loath to be first movers

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The Prequin report highlighted that both private equity and hedge fund managers were not moving fast to undertake crowdsourcing campaigns. “The Preqin survey of alternative investment managers shows that the uptake of the JOBS Act will be relatively low in the short term. The Act could provide some benefits to managers but these appear to currently be outweighed by a number of concerns including increased scrutiny of regulators, the negative perception of marketing and the additional costs that advertising would bring.”

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The report was more sanguine on the future prospects for crowdsourcing and said the innate conservatism of fund managers was a big part of the slow start. “However, many fund managers are wary of being the first movers in this space, and with the first adverts already printed, we could see a shift in attitude in the future as alternative asset funds – in particular hedge funds – begin to think of new ways to attract a different audience to their vehicle.”