This past winter I consulted with a CrowdFunding platform called Exploration Funder, which is currently not operational. When asked what I was working on I’d respond, “Equity CrowdFunding” which often received confused looks. This article is to explain the basic premise of equity crowdfunding.
Crowdfunding is the concept of sourcing small amounts of money from many people. The sum adds up to something substantial, crowdfunding originated with Kiva.org. They realized that many people could fund the businesses of overseas entrepreneurs with micro-finance loans. More recently the industry pivoted towards products on Kickstarter, the concept of ‘pre-sale’ or ‘pretail’ allows a company to prove the demand for their product prior to manufacturing. The newest edition is equity crowdfunding, providing investors the opportunity to receive equity in emerging start ups. Most of what I’m discussing applies in the United States. Canada has backwards and confusing securities policies making it more complicated with a smaller market, although provincial laws are in the process of being updated.
Essentially there have been a few awesome changes in American securities law which are causing some pretty big shifts in how Small and Medium Sized enterprises raise money. In April 2012 Obama passed the JOBS act which stated that the SEC should change a few things and streamline the ability to invest in businesses creating jobs. How could any politician not pass a bill labeled ‘JOBS’…genius! (Jump Start Our Businesses)
It then took the SEC (Securities and Exchange Commission) about 18 months to pull things together and in September 2013 private companies could publicly disclose that they were raising money. Rules around public solicitation had been in place since 1934! This opened up opportunities for web portals to enter the picture presenting a start up from Miami to an angel investor in Boise, Idaho. Accredited investors could now find deals that were previously not accessible. What hasn’t changed, but is in the process of changing is opening the market up to the non-accredited investor. I know most of you are saying stop speaking Swedish! What is an accredited or non-accredited investor? There is a list of criteria that declares you are essentially eligible to invest in a highly volatile or risky new venture. Essentially if you are rich you can waste your money on pipe dreams or make a fortune on the next Google. So do you qualify? Do you make over $200,000/year or $300,000/year/household? Or have liquid assets other than real estate of over a million US? If yes…you are an accredited investor. Since that probably applies to about 1% of my readers the rest of us will have to wait for the JOBS act Title 3 to be implemented.
In October 2013 the SEC announced a proposal regarding how Title 3 would be implemented. The proposal required additional reporting if companies wanted to raise money from non-accredited investors adding an additional burden on any company choosing to pursue non-accredited funds. This could cause all upper tier or mature companies to avoid average investors and essentially nullify the intended changes to open up the markets and raise funds from everyday individuals. Title 3 also limits the amount invested depending on the investors income level to prevent individuals from loosing everything on a high stakes start up.
If you liked this post my next article will be around the major players in the equity crowd funding space. If you’d like me to dive deeper regarding any of the points mentioned above post in the comments section.