Equity Crowdfunding Explained
Move over, investment banks and commercial banks. Equity crowdfunding may soon become the primary vehicle small businesses will employ to finance growth.
How Big is It?
Equity crowdfunding eclipses the other types of crowdfunding, according to a 2013 report from Massolution, raising 40 times more per company than royalty, reward, and debt or donation crowdfunding. Globally, the amount raised through crowdfunding in general is on the rise (estimated to reach $17 billion in 2015), while the value of small business loans on the books at U.S. banks is dropping (down 32 per cent from 2008).
How It Works
It’s usually a sale of a share of stock in your company or some other security in exchange for capital from an investor, or group of investors, as the name implies. Small businesses set a valuation for the capital raise, establish funding goals, and work with one of the growing number of crowdfunding platforms (or do it themselves) to attract funders.
Three Different Kinds of Equity Crowdfunding
Private Crowdfunding is suitable for entrepreneurs who prefer not to expose their fundraising campaign to the public. Accredited investors access a password-protected websites to view private investment opportunities. These offerings generally leverage Rule 506(b), which has no limits on either the amount that equity issuers can raise or the number of investors that can invest.
Public Crowdfunding from Accredited Investors has been an option since Title II of the Jumpstart Our Business Startups (JOBS) Act came into effect in September 2013. As with Rule 506(b) crowdfunding, there are no limits on capital raised or numbers of investors, but these deals, known as Rule 506(c) deals may be generally solicited, exposing entrepreneurs to a potentially huge pool of potential investors. One big catch. All the investors must be verified as accredited investors using reasonable steps as prescribed by the Securities & Exchange Commission (SEC). When people talk about equity crowdfunding (at the time this article is being written), they usually are referring to these Rule 506(c) offerings.
Public Crowdfunding from Everyone is supposed to be the big game-changer. It’s covered by Title III of the JOBS Act and is true “crowdfunding.” Unaccredited investors – that’s most of the population – will be able to participate and purchase securities via crowdfunding platforms. Entrepreneurs will be able to reach as many as 50 million Americans. SEC regulations containing specific reporting and disclosure requirements aren’t expected until late 2015 at the earliest, but many are betting that this form of crowdfunding will revolutionize the finance industry. There are, of course, naysayers who point out that the obstacles to conduct this sort of crowdfunding may be too onerous for many to use it.
Regardless of which method of equity crowdfunding you use, raising money is the easiest it’s been in decades.
While you wait for the SEC’s regulations on Title III crowdfunding, the only way you can publicly solicit for investors now is if you ensure that your investors are accredited. There’s no better way to verify your investors through legally compliant methods than with VerifyInvestor.com.