Editor's Note: This is the third in a four-part series exploring new fundraising options for small biotechs.

If H.R. 1070 is the capital formation bill likely to have the most immediate impact on biotech by providing an IPO alternative for small companies, then H.R. 2930 – which would let private firms raise up to $2 million through crowd-funding – might have the most long-term impact by helping start-ups bridge the valley of death.

Or not. There are plenty of hurdles that could prevent crowd-funding from taking hold in biotech, including the complex subject matter and long-term investment horizon. Some investors don't think crowd-funding is a good way to solve the industry's problems, and even those that do aren't convinced equity incentives are needed.

But however it plays out – whether it remains niche or becomes mainstream – crowd-funding is coming to biotech. And it's coming whether H.R. 2930 passes or not.

Crowd Control

Crowd-funding is essentially the modern day, social media-backed evolution of Renaissance-era patronage for the arts. Through websites like RocketHub.com and KickStarter.com, musicians, artists, filmmakers, dancers, authors and other "creatives" can post a video describing their project and raise money from the masses.

As of now, perks – CDs, T-shirts, books – are the only thing creatives can offer in exchange for funding. Equity is reserved by the SEC for accredited investors, with a few small exceptions such as for "friends and family."

But even without equity, crowd-funding has gained massive momentum. And in the nonprofit sector, efforts like President Obama's election campaign and the 6 million-member Campaign for Cancer Prevention have illustrated the power of social networks. Which got people thinking, what if entrepreneurs could offer private equity to the masses?

Enter Rep. Patrick McHenry's (R-NC) H.R. 2930, the Entrepreneur Access to Capital Act, which passed the House 407 to 17 earlier this month and is now in the Senate. The bill would allow private companies to raise up to $2 million annually through crowd-funding – essentially opening the private markets to nonaccredited investors. But since that also exposes investors to risk, individual investments would be limited to the lesser of $10,000 or 10 percent of the investor's annual income.

Crowd-funded securities would be exempt from state Blue Sky regulations and from regulations that force a company to start reporting to the SEC when it has a certain number of shareholders.

A related bill, H.R. 2940, which also passed the House earlier this month, would then let private companies that needed to raise more than the $2 million crowd-funding cap advertise their private offerings and reach a broader pool of accredited investors.

But if average investors are going to invest in private companies, there "has to be a way for them to realize a return without waiting for the company to be sold or go public," said William Hicks, a partner with law firm Mintz Levin.

That piece of the puzzle might be solved by firms like SharesPost and SecondMarket: They give liquidity to employees who receive stock options in big private firms like Facebook and Twitter by placing those private shares with venture capitalists, institutional investors or accredited investors.

Neither company returned calls for this article, but one could imagine how a similar system might spring up to offer some liquidity to crowd-funded securities.

Can Biotech Mingle?

Assuming the crowd-funding bill passes, opinions vary greatly on whether investors will be interested in funding the complex science done by biotechs.

RocketHub founder Brian Meece noted his site is already funding science. A postdoc is raising money for research on yeast models for cancer. A graduate student is seeking funding to analyze the therapeutic potential of snake venom. And RocketHub just started a program called the #SciFund Challenge, which Meece said raised $50,000 for various science projects in its first 15 days online.

"So yeah, $50,000 to $300,000 is totally doable in the crowd-funding world," Meece told BioWorld Insight.

And that might just be enough to help an academic do the animal toxicology or other experiments needed to get across the valley of death and secure the interest of venture capitalists or pharmaceutical partners who can take the project to the next level.

Canaccord Genuity Inc. investment banker David Schechner was similarly optimistic. "I see companies raise tens of millions through friends and family and community networks," he said. Crowd-funding is "just another distribution platform."

But Stephen Muniz, partner with PureTech Ventures, said he doubts there is enough "mom and pop money out there" to push many biotechs up to the $2 million cap. Still, he acknowledged that a couple hundred thousand dollars "could be the difference between having an idea and actually getting out of academia and doing it." It's probably not a solution to the valley of death, he said, but "every mechanism out there helps."

Bob More, general partner with Frazier Healthcare Ventures, said he's "not sure this is the right way" to address the valley of death. He explained that the reason venture capitalists don't invest in early stage biotech is because they can't make money doing it. "That's the problem we need to solve," he said. If investing in early stage biotechs was profitable, VCs would get on board.

If crowd-funding does gain momentum in biotech, it will likely require a social forum in which investors could help each other understand complex scientific concepts, intellectual property positions and regulatory risks. "I could see it developing like e-bay ratings or 'likes' on YouTube," Mintz Levin's Hicks said. People with a lot of industry knowledge might endorse certain projects, he added.

Yet More cautioned that "money just following what's perceived as smart money is very dangerous – that's how you get Bernie Madoff situations."

More also worried that the web-driven platform for crowd-funding rewards the "ability to tell stories" rather than good science. That's an argument RocketHub's Meece said he hears often, but he counters that the ability to communicate is important in any business.

Charity or Investment?

Although H.R. 2930 would let crowd-funded companies issue equity, some folks think biotech crowd-funding might look more like a donation than an investment.

It's certainly not likely to provide much of a financial return. Beyond the fact that nine out of 10 early stage biotech projects fail, even if the crowd-funders did manage to pick a winner, they'd face massive dilution before that bet paid out.

"When the so-called smart money comes in, they'll get crushed. They'll get diluted into the ground," Hicks said. For biotech crowd-funding to be attractive from an investment perspective, the VCs would have to set aside a small percentage of the company for the crowd-funders and not dilute them, Hicks said – and the VCs BioWorld Insight spoke with for this article said that's not likely to happen.

So if investors aren't likely to support biotech crowd-funding, who will? Donors are one possibility. After all, groups like the Cystic Fibrosis Foundation have pioneered venture philanthropy by investing millions into biotech – might the CFF's donors also be interested in directly backing a few start-ups in the cystic fibrosis field?

"You need the legislation to allow them to get an investment return at all, but the driving force would have to be passion," Hicks predicted.

More, however, isn't sure donors are the answer to the valley of death problem either. "I'm hoping that this industry is actually an industry and not a charity," he said.

Meece sees another possibility. He agreed that financial return is probably not the best motivator: The average contribution on RocketHub is $70, and the most popular price point is $20 – so even a 5X or 10X return wouldn't mean much. Yet he said most of RocketHub's supporters are not affluent donors, either. They're just people who want to make a difference.

"Most of the world has a little money to give and wants to feel good about it," Meece said.