When I first heard about 40billion.com I was surprised.  It claimed to provide a platform for entrepreneurs to solicit investment in their businesses.  How could a small business use a web site to solicit investments without first registering the offering with the federal Securities and Exchange Commission and all 50 state securities regulators?  40billion.com’s strategy is to circumvent the securities laws by characterizing “investments” made through its web site as contributions/gifts rather than a true investment which implies the expectation of a return.

One of the questions asked of the entrepreneur when completing the form for a capital raise on 40billion.com is “What incentive will funders get for funding your business? E.g., customer discounts, free items or services, financial return, progress updates?”  This invites a user of 40billion.com to promise a financial return to an investor.  Doesn’t that sound a lot like a security?  The web site’s terms of use document disclaims all liability and responsibility for the actions of the entrepreneurs that use the web site to raise funds and reserves the right to remove any content that might violate the law.  I wonder if a raise promising a return would be removed?

Whether this is a brilliant innovation or a risky gambit is difficult to say.  According to an article in The Oregonian, Oregon securities regulators are investigating 40billion.com.

40billion.com is part of a growing phenomenon called crowdfunding — the use of the internet to raise funding for various causes.  40billion.com is similar to ChipIn.com and micropledge.com, except that 40billion.com is focused exclusively on funding for business.  Other crowdfunding sites are used for things like anniversary presents and car repairs.

I recently saw an article about a company called Sellaband based in Amsterdam.  The company provides fans the opportunity to contribute to the making of an album.  If the funding target is reached, the fans and the artist share in the proceeds.  If the target is not reached, the funds are returned.  According to one commenter on the article, this is not a security, it is a pre-selling of a product.

Another interesting strategy can be found at beerbankroll.com.  This is a crowdfunding platform that sells $50 memberships that will ultimately be used to open a brewpub.  The idea is that this is not a security because it is a membership which brings with it some benefits – a t-shirt, a chance to win prizes, and the opportunity to participate in a community-managed brewpub!

Here are some more interesting articles on crowdfunding:

http://filmmakeriq.com/development/investors/crowdfunding-for-film.html

http://elr.lls.edu/issues/v29-issue3/documents/08.Kappel.pdf

http://www.businessweek.com/smallbiz/running_small_business/archives/2008/07/crowdfunding_yo.html

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