2013 Prediction: Crowdfunding Pays Off

Crowdfunding models like Kickstarter took off in 2012--now we'll wait and see how transformative those models are.

Crowdfunding Pays Off

Jesse Lenz

Science and technology have utterly transformed human life in the past few generations, and forecasts of the future used to be measured in decades. But big changes arrive faster and faster these days. So here we've shifted our forecast to the near-term, because we're right on the verge of some extraordinary stuff. These are the trends and events to watch out for in 2013. See them all here.

On April 5, 2012, President Barack Obama sat at a small, wooden desk in the White House Rose Garden and signed the JOBS Act, one of the most transformative pieces of securities legislation written since the Great Depression. Among the 22 pages of dense legalese, one section stood out: the Crowdfund Act. Pending the creation of SEC regulations later this year, new businesses will be able to make their own IPOs, and small investors could act as venture capitalists.

Start-ups and inventors raised an estimated $2.8 billion on crowdfunding platforms such as Kickstarter in 2012, a 529 percent increase from 2009. But they could only solicit donations, presales of products, and loans. By allowing equity investment, lawmakers expect to supercharge crowdfunding, which would make nascent businesses less reliant on angel investors and banks while spurring innovation across a wider range of companies.

There are, of course, pitfalls. More than half of all start-ups fail within 10 years. "It's not clear yet whether the wisdom of the crowds will hold for picking successful businesses," says Josh Lerner, a professor of investment banking at Harvard Business School. Investor losses could lead to big disappointments, litigation, or, worse, allegations of fraud, says Bryan Sullivan, a lawyer in California. "My mother is a secretary," he says. "My father is a construction worker. Those are the kind of people who would throw $5,000 in and think they can make $100,000. What happens when it fails?"

The crowdsourced-equity model is not untested, however. The Australian Small Scale Offerings Board has transferred about $130 million to start-ups since 2007 with little reported fraud. Plus, the Crowdfund Act helps protect investors: Those who make less than $100,000 can commit only $2,000 or 5 percent of their annual income, whichever is greater. The act also requires company disclosures, so investors can do their due diligence. Once the SEC sets the ground rules, anyone who backs a great idea will stand to profit. But the biggest benefit will likely be to innovation itself.