Energy Law Wisconsin Blog

Crowdfunding in the Energy Arena: A Child of Necessity

“Necessity is the Mother of Invention” – Unknown

If “Necessity is the Mother of Invention”, then crowdfunding could be considered one of Necessity’s healthy and growing offspring. Generally speaking, “crowdfunding” refers to a growing phenomenon through which people who wish to individually provide relatively modest amounts of financial support for a creative project can pool their resources and collectively raise a significant amount to permit the project to go forward.  These pooled funds are used to finance the creative endeavors of artists, musicians, and inventors, among others, with projects ranging from concert tours, to independent films, to inventions and recently to renewable energy projects, such as installing solar panels on the home office of a non-profit organization.

How does Crowdfunding work? Crowdfunding comes in different varieties of business models.  Some crowdfunding efforts are limited to donations in support of a project.  Others involve pre-purchases of products and some involve the sale of securities to investors.  This last variety of crowdfunding and persons who promote it as intermediaries will be receiving attention from the Securities and Exchange Commission in the coming months, as discussed in greater detail below.

Crowdfunding is typically accomplished over the Internet and a growing number of internet sites provide a forum for interested patrons to pool their resources in support of projects they deem worthy. One well known crowdfunding site is Kickstarter. It is important to remember, however, that not all crowdfunding sites operate by the same rules. Some require that a project seeking funding obtain its full funding target before the money is released to the project developer; others will turn over whatever is raised regardless of whether the targeted funding level is achieved.

Crowdfunding in the Energy Arena.  A recent example of crowdfunding success in the energy arena is the tPOD1 developed by Tellurix. The tPOD1 is a device that converts thermal electricity from a small source, such as a tea candle, to an electric current, which is then used through a charger to repower small mobile electric devices, such as cell phones, iPods, etc. One of the possible applications of this invention would be for outdoor enthusiasts, who might need to recharge a mobile device to make an emergency phone call or send a text message. Tellurix sought to raise $85,000 via Kickstarter. It met its goal on June 22, 2012 and as of July 15, 2012, had raised $111,697.

Another forum for crowdfunding in the energy arena is the New Generation Energy website. This site limits fundraising to non-profits and allows the public to donate to “green energy projects” at nonprofits nationwide.  On a recent visit to the site, I saw requests for projects that included high-efficiency lighting and HVAC equipment, solar PV systems, and a geothermal energy system.

While not crowdfunding in the strict use of the word, a new company in Oakland, California, Mosaic, Inc., is in the process of raising $2.5 million to fund a crowdfunding-like platform specifically for solar projects.  Mosaic, Inc.’s website says that it is currently in a “quiet period” following its April 24, 2012 filing with the SEC to offer “Solar Power Notes” to investors. In response to my initial online request for more information, Mosaic, Inc. informed me that the initial launch of its platform will not include Wisconsin. Additionally, Mosiac, Inc’s services do not constitute “crowdfunding” as described in Title III of the Jumpstart Our Business Startups Act (JOBS Act), according to their website.

How might Crowdfunding be Helpful for Renewable Energy Projects in Wisconsin?  Crowdfunding offers renewable energy projects developers, particularly solar projects undertaken by nonprofits, a source of funding that can be well-suited to their needs.  Crowdfunding can address one of the biggest barriers to project development: the high initial capital cost of a project.  Moreover, single building solar PV projects are often in the price range (10s to 100s of thousands of dollars) where crowdfunding business models and platforms may be able to help in raising funds without expenses that are disproportionately large relative to the size of the project.

Crowdfunding may turn out to be particularly helpful for Wisconsin nonprofits, who currently face daunting project development barriers in that they cannot: (a) directly take advantage of the benefits of tax credits and depreciation to assist in financing a project; and (b) indirectly take advantage of such tax benefits through leases and power purchase agreements with third parties without the third party risking being deemed as acting as a unregulated public utility.

Legal Issues with Crowdfunding.  From a legal perspective, crowdfunding is a new phenomenon and is getting increasing regulatory attention, particularly where the sale of securities is involved. In the JOBS Act signed into law of April of this year, Congress amended Section 4 of the Securities Act of 1933 to create a new exemption for offerings of “crowdfunded securities”.

According to FAQs about Crowdfunding Intermediaries published by the SEC in May 2012, the exemption would apply to issuers of such securities when they offer and sell when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies other conditions in the JOBS Act, some of which will require rulemaking  by the SEC”. It is important to remember that the exemption will not be available until after the SEC has adopted rules creating the new exemption.

Crowdfunding has already had a significant impact on the entrepreneurial marketplace.  A news article from May 2012 estimated that crowdfunding raised $1.2 billion globally in 2011. It is likely to receive additional attention in the future.

Early commentators are split on whether by the time the SEC issues its final crowdfunding rules, crowdfunding will remain a viable avenue to raise funds from small investors or whether it will be choked by onerous disclosure requirements and red tape. It will be interesting to see the requirements that the final SEC crowdfunding intermediary regulations establish for such intermediaries and future crowdfunding portals.

Written on July 9, 2012 at 11:50 am, by Michael Allen