Can Equity Crowdfunding Transform Startup Investing?

Few would dispute that crowdfunding is enjoying a moment. Kickstarter, Indiegogo, GoFundMe. These have all become household names. They began as ways for creators, artists, and (sometimes) entrepreneurs to present campaigns about their proposed projects or products and to solicit donations from the crowd to bring them to fruition.

Because they were donation-based – save for gifts to backers from a campaign’s organizer – none of the early crowdfunding platforms ran afoul of America’s stringent securities laws and regulations. But that rapidly changed with the emergence of equity crowdfunding.

A New Kind of Fundraising

Over the past few years, numerous companies have emerged to build platforms for startups to raise funds by selling equity. Securities rules were not prepared for the change and some countries adapted more swiftly than others. The United Kingdom was an early adopter, making it fairly easy for platforms to do business. Crowdcube launched in 2011 and Seedrs followed suit in 2012, offering British startups a rare opportunity to access investment capital through a channel other than institutional investors and grants.

Slowly but surely the United States has played catch-up, loosening laws so that equity crowdfunding became legal – if restricted – in 2016. Crowdfunding companies have jumped at the opportunity. Indiegogo, for example, launched an equity-raising platform toward the end of 2016 that has seen companies raise $7.53 million through 11,000 separate investments. That is tiny in the scope of venture investing, but it is a remarkable start. The opportunities for the industry are tremendous, provided the government keeps its hands off.

A Slow Evolution

The United States, despite traditionally leading the world in financial innovation, has been slow to adapt or to understand the power of equity crowdfunding. Right now, the rules are very strict. For the most part, only individuals who qualify as “accredited investors” are allowed to invest.

For an individual to be accredited, they need to earn $200,000 per year and/or have a net worth of $1 million. Not a whole lot of people qualify under those rules and many who do are the kinds of people who could access the startup space through the established venture capital channels. That said, many accredited investors clearly see value in platforms. It certainly gives them more control over what companies they choose to back, rather than having to trust a fund manager. Likewise,…

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