If you have been reading my blog regularly over the last few months, you know I have been keeping an eye on the possibility of the crowd funding elements of the recently passed JOBS Act replacing non profit status as a viable method of creating and sustaining an arts organization.
Hat tip to Charity Lawyer Blog’s Ellis Carter (whom I have previously incorrectly identified as male. Sorry about that Ellis) for her link to a piece on Startup Company Law Blog about the problems with the law.
Author Joe Wallin confirms many of the general suspicions I had about the costs of compliance probably being overly burdensome given the $1 million limit.
One thing that surprised me was that the law actually prohibits start ups from the “do it yourself” approach which I have always assumed to be a hallmark of start ups.
3) The Law Forces Companies To Use Intermediaries
The law forces startups to use intermediaries to raise the funds. This is fundamentally different from what typically happens with startups. Most startups raise funds without the help of intermediaries. In fact, this is the prevailing norm for startup companies. The typical advice to a startup is–don’t use an intermediary! Founders, do it yourself! But here the law forces companies into the arms of either registered broker-dealers or registered funding portals. These entities are subject to numerous requirements, and their compliance with those requirements will make the process much more difficult and costly for companies.
Maybe arts organizations with their bare bones mentality about providing a product might make it work within the restriction, but the whole point of pursuing an alternative to the non profit business model is to adopt an alternative approach and mindset about providing cultural experiences. (a.k.a. ramen isn’t a default food group for artists.) Though it will probably bring it own attendant problems, success might be measured by how diversely arts and cultural organizations manifest after phasing away from non-profit status.
At the end of his post, Wallin suggests Congress go back and make some changes to the law to allow start ups to proliferate more easily. I am sure there is still plenty of opportunity for successful crowd funded start ups within the law. If it isn’t changed before that, perhaps the successes will lend credence to the idea this can be a viable path for entrepreneurs, moreso with a few changes.
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