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Jessica Chesher

Managing Editor

Innovation eReview
Industry Tools: Crowd Funding

Crowd Funding for University Research

Crowdfunding as a mechanism for investing in science and technology commercialization is coming. Crowdfunding was authorized  by Title III of the Jumpstart Our Business Startups Act ("JOBS Act") as an exemption to the law prohibiting companies from issuing securities to the public unless the company has registered the offering with the SEC. Title III is named: “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” or “Crowdfund Act”. The SEC is overdue in issuing the rules to implement the Act to the consternation of some of the intermediaries springing up to implement the new investment mechanism.Crowdfunding currently exists but not as an investment mechanism.   Entities like Kickstarter.com facilitate artists bringing ideas to their fans and others to obtain financing for their projects. Rather than an investment, the return is something like acknowledgement, a tee-shirt or a copy of the album or an opportunity to follow videos about the project. It functions like funding for public radio, and offers the ability to be part of something the contributor believes in or wishes to see created. 

This idea has been replicated in the scientific community with sites such as: FundaGeek, TechMoola, #SciFund Challenge and RocketHubuStartups was formed specifically to fund university faculty and student research and commercialization projects. People provide support for projects they believe in and welcome the opportunity to follow a project and participate in the progression of the project. Some funding seekers have found unique ways to offer rewards in return for support without giving away an equity interest or incurring debt. 

The money donated through current crowdfunding sites is gathered through a funding portal or intermediary that is for-profit and takes some cut of the money collected. The money is not charged to the contributor’s account unless the full amount needed for the project is pledged. Potential issues include a lack of ability to oversee/control the completion of the project or evaluate the reasonableness of the estimate, or technical issues or unanticipated events that may result in failure.  Nevertheless, proponents of crowdfunding for STEM research cite a number of advantages: 

Crowdfunding requires a presentation to the public about the research and its next steps.  This creates an  opportunity for scientists and engineers to get in the habit of communicating about their research with the  public. It hones the ability of researchers to skillfully explain the context and importance of their invention, and move beyond the isolation of their laboratories.  It offers insight from ability to see the type of questions and level of interest from the broader community can provide opportunities for greater insight into the value and application of their technology. 

Crowdfunding provides opportunities to university researchers beyond technology transfer offices. Not as complicated as free agency, the researcher retains all IP rights, and has the opportunity to see if by putting his/her ideas out on a site such as uStartups, they can raise the amount of money or partnerships they need when there are few other options they are aware of. It can provide funding to faculty and student researchers facilitating the continuation of their science and technology-based university inventions once federal funding dries up and VCs are not interested in a long, slow project. Naturally there are IP protection issues that must be carefully navigated.

Once the SEC rules are finalized, crowdfunding will be an investment mechanism.  The authorizing legislation envisions registration requirements for intermediaries and issuers, dollar limits for investments, requirements for intermediaries who will set up the funding portals and take a percentage of the money raised. Intermediary requirements include: disclosures, educational materials, background checks, review period, and hold on investment funds being released until the target investment has been met. 

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