Kiki Karpus invests in start-ups and emerging businesses ― well, sort of. Instead of choosing the companies based upon the likelihood of their success, Karpus’ investment is not for financial compensation. Rather, she and other young professionals are part of a growing phenomenon called “crowdfunding.”
“As of today I have invested in 3 different kickstarters, all for different reasons,” Karpus e-mailed me. Kickstarter.com is a pioneer in the crowdfunding concept. It elevates the peer-to-peer lending concept to a new level because crowdfunding participants do not make traditional investments. “I believe the essence of ‘crowdfunding’ lies in the ability to easily become part of something bigger than yourself,” she says.
Karpus is a trained art director with New York City agency experience and has post-graduate education in her field. She is currently a freelance art director, graphic designer and represents the intelligent, well-educated trendsetters driving this unique way for nontraditional businesses to raise money quickly.
By contrast, Mike Rozman is a traditional financing executive and a trendsetter who embraces a nontraditional way to match up entrepreneurs with financial institutions. He is co-president of BoeFly, an online marketplace with over 2,200 active lenders. The company’s financial institutions provide financing for businesses, franchises and income-producing real estate projects. Prospective borrowers are quickly matched with the lenders that are most apt to be interested in their deals.
Rozman says that unlike BoeFly’s lenders and borrowers, crowdfunding participants do it “for the same reasons why anyone makes a charitable contribution to the arts or the like.” Indeed, nonprofit organizations, such as National Public Radio have begun to use crowdfunding techniques to spark interest from nontraditional donors. During NPR’s spring fundraising campaign, local stations asked for small donations in any amount. And in return, contributors were offered program schedules, coffee mugs or sweatshirts, depending on the size of their contribution.
Rozman says that unlike the unstructured and subjective rationale of crowdfunding, “the lenders on BoeFly are diligent in their work when they make a loan to a borrower whom they connect with on BoeFly.” They adhere to objective financial benchmarks and require documentation. The BoeFly method, however, harnesses technology to dramatically simplify and quicken the process of attracting lenders and closing commercial transactions.
Crowdfunding enhanced its legitimacy when President Barack Obama signed the JOBS Act into law on April 5. In part, the act gives the Security and Exchange Commission the responsibility to write less restrictive rules for businesses raising money from very small investments.
SEC’s rules are due out in 270 days from the law’s enactment and might not treat money raised by crowdfunding as a security. In that case, the expensive registration and disclosure requirements typical for securities could be relaxed for crowdfunding.