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Crowdfunding is a method of raising capital through the internet for business ventures. While crowdfunding is not yet a viable option for investing public mining companies, once the legal hurdles have been cleared it could be an alternative method of raising money.
By Karan Kumar – Exclusive to Resource Investing News
Several websites have sprung up to help those seeking cash to start a new business. One can raise money at ProFounder if they are registered as a C corporation (any corporation, under US income tax law, that is taxed separately from its owners), which makes it legitimate to receive crowdfunding investment. At ProFounder, investors actually get stock in the company. At RocketHub, which calls itself a launchpad and community for independent artists and entrepreneurs, the idea is to “pioneer the new creative economy together.”
Mining the moon’s ice
RocketHub’s projects include charities, songwriters, a T-shirt company that donates toward genetic research and Shackleton Energy Co, founded in 2007, which wants to become the world’s foremost space-based company providing rocket propellants that are expected to come from mining the ice located within deep, inhospitable ultra-cold craters at the polar regions of the moon.
Shackleton wants to raise $1.2 million and has so far realized 1 percent of that goal by raising $5,517 through RocketHub. Bill Stone, who has experience in extreme mining operations and is the chairman of Shackleton, told Wired magazine in an interview: “We are ready to launch this space program and will use the proceeds of this offering to jumpstart the huge engineering and organizational effort necessary to have our industrial astronauts on the Moon by 2020 and be open for business.”
For those looking to mine on earth, crowdfunding still does not offer the opportunities that a more traditional route, such as a private placement or an initial public offering, offers, said a London-based analyst, who requested anonymity. “Mining is heavily regulated and crowdfunding is still a very early vehicle of financing with many legal questions still unanswered. It will be a while before a junior miner gets cash through crowdfunding.”
No crowdfunding mining deals yet
The analyst added: “I haven’t heard of any mining deals in the crowdfunding space. I have heard of an environmental charity raising money to save rainforests in Eucador. The problem is that crowdfunding is a viable option for private companies. The legal landscape will have to change drastically before publicly traded companies can raise money this way.”
The legal landscape for crowd funding is probably its biggest downside as soliciting money from the general public is often illegal unless the investment has been listed with the appropriate securities regulatory authority in the specific country, such as the Securities and Exchange Commission in the US, the Ontario Securities Commission in Ontario, Canada and the Financial Services Authority in the United Kingdom.
In November 2011, the US House of Representatives passed the Entrepreneur Access to Capital Act, which reduces restrictions on small-scale crowdfunding of for-profit businesses currently present in state and securities law. In layman’s terms, the bill allows individuals with ideas or small businesses to use crowdfunding over the internet by selling non public-securities to the public through “social media solicitations” – essentially asking for money in exchange for some promise of return at a later date, according to an article on the Daily CrowdSource website.
Bad players not allowed
Another website called Startup Exemption, which wants to make crowfund investing legal, reports: “Disclosure and communication are the investor protection in crowdfunding. Bad players are not allowed to participate and are screened out in the background check. The disclosure about who the entrepreneur is and how we identify him leads to accountability.”
The website adds that crowdfunding’s opponents are the regulators and special interest groups who are “using the fear of fraud and investor protection to protect their territory and pocketbooks. The reason we advocate preempting both state and broker/dealer requirements is that we already advocate for sending data to both the SEC and state. Adding a bureaucratic layer at the state level will only burden the process, lengthen the time and increase the cost. Broker/dealers are important in traditional financing because they vet a deal and market it to the public.”
The analyst said that it will be years before the legal backdrop allows crowdfunding to take the place of traditional funding for at least small amounts of money that junior miners need to start projects that hold potential.
Securities Disclosure: I, Karan Kumar, hold no direct interest in the companies mentioned in this article.