Crowdfunding in itself is no longer revolutionary. After all, Kickstarter and other platforms have been successfully helping startups and entrepreneurs for years now. While some have been successful with crowdfunding, others have struggled. This funding option has always seemed a bit on the unreliable side, to put it diplomatically.
Legal Changes to Decades-Old Regulations
New federal crowdfunding rules are changing crowdfunding however so that companies have a more promising chance of relying on it. The new rules allow companies to raise up to $1 million from amateur investors without any approval from the Securities and Exchange Commission (SEC).
There are limits in place though. The amateur investor who makes less than $100,000 per year can only invest $2,000, or five percent of their annual income or net worth. This is called "Regulation Crowdfunding," and it was created in the 2012 Jumpstart Our Business Startups Act (JOBS Act). Some states, like Illinois, are allowing up to $4 million to be raised from venture amateurs.
New Fundraising Platforms Pop Up
This has led to an explosion of equity crowdfunding companies that include portals like VestLo, Crowdfunder, EquityNet, DreamFunded and StartEngine. The idea that you can not only get rewards as an investor but also a piece of equity through a crowdfunding campaign is seen by some as a way that companies will raise much more than by Indiegogo or Kickstarter alone.
"With the arrival of Regulation Crowdfunding, access to capital through equity crowdfunding will allow for faster innovation," says StartEngine's company blog, "This means growth for privately-owned businesses of all sizes, especially smaller and early stage companies."
Benefits and Concerns of Amateur Investors
For companies, this equity crowdfunding opportunity means being able to access more money, more quickly than via traditional funding routes. While it sounds promising, what will it really mean to give a piece of your company to someone who is not an accredited investor in exchange for cash? It's one thing to give someone a reward like a signed book or free product, but it's entirely different to give up a portion of your company.
From one perspective, this will mean a more diverse pool of investors who have different reasons for being involved. It may add innovative thinking and disruptive ideas to the DNA of companies. Perhaps it will increase chances for success. On the other hand, novice investors may lend their inexperience to an arena in which it is not welcomed, or where it may actually hurt a company's progress.
Most of the companies I've talked to who receive funds from these amateur investors don't appear concerned though because it does not appear there is the same push to get involved in the actual business. Instead, these amateurs appear to realize that they wouldn't have a clue what to do and are much happier to just provide money and stay out of the day-to-day operations that angel investors and VCs want to dive into.
Yet, on the day that this new regulation went into effect, some are already hearing the death knell for the term "equity crowdfunding." According to a TechCrunch article, this is because it doesn't accurately define what could become even more promising - a marketplace model that would add transparency to private equity where it had not existed previously, as well as streamline sourcing for investors.
Above all this, going beyond the initial idea of crowdfunding, even if it hasn't reached its potential yet, is something that can create a bright future for entrepreneurs and investors of all backgrounds. It's also refreshing to know that U.S. regulatory agencies are finally taking steps to embrace the benefits of new ways to fuel the economy.