Crowdfunding successes show value of small donations

A proposed change in US legislation would allow everyone to invest in start-ups

FANCY investing in the next Twitter? Or putting some money behind the new Facebook? More people might soon get the chance.

On crowdfunding website Kickstarter, more than 87,000 people donated a total of over $3 million in February and March to help create the video game Double Fine Adventure (pictured). This is good news for gaming fans, but it also highlights the limits of the burgeoning crowdfunding movement in the US. People who gave on Kickstarter are viewed as philanthropists, not investors. Their reward for a $15 pledge is a copy of the game - those who contributed more will get additional treats - but if Double Fine Adventure turns into a blockbuster, they won't see a penny of the profits.

Legislation making its way through US Congress could change that, allowing anyone to invest in the latest cool idea, with the prospect of making a profit one day.

US Crowdfunding sites like Kickstarter, Indiegogo and RocketHub are held back by laws, created in the 1930s, that prevent small investors from taking equity in firms. The new bills would bring the US more in line with the UK, where such investment is allowed.

The Crowdfund Act, which passed the Senate last week as an amendment to the larger Jumpstart Our Business Startups Act, would let anyone invest up to 5 per cent of their annual income, or $2000, in a project or firm that is listed on a crowdfunding website. People earning more than $100,000 a year would be allowed to invest 10 per cent of their income. The bill now goes back to the House of Representatives, which passed a similar bill in November. If signed into law, start-ups would be able to raise up to $1 million from small investors.

The move would be a boost to tech innovation across the US, says Sherwood Neiss, one of a group of entrepreneurs who are lobbying for the legislation change. Neiss told the House in a hearing in September that at least 500,000 start-ups will launch over the next five years once they can access money from small investors.

"There is tremendous value in having your most passionate users be your investors," says Nick Tommarello, founder of the site Wefunder.com. As New Scientist went to press, more than 3000 people had signed a petition on the site, saying they would invest if the law passes.

Meanwhile, Kickstarter's success continues apace. In just the past six weeks, four projects on the site, including Double Fine Adventure, have raised more than $1 million each in funding: two video games, an iPod dock and a comic book.

So does more crowdfunding mean more creativity? Absolutely, says Kickstarter founder Yancey Strickler. He points to the success of the TikTok, a wristband that turns an iPod Nano into a watch, which he says kicked off a "revolution in DIY manufacturing" with the help of his site.

Christine McKillip, a lawyer at law firm Handler Thayer in Chicago who has been following the bills closely, fears that worries in the Senate over internet fraud and too much state regulation could yet stymie crowdfunding's rise.

"Although regulation can deter potential fraud, it also raises the costs of offerings substantially and, in the case of microfinancing like crowdfunding, the US Securities and Exchange Commission may regulate it out of existence," she says.

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