Crowdfunding – the raising of large amounts of capital by means of small contributions from many people – passed a significant milestone on June 19, 2015, when the SEC’s new Regulation A+ went into effect. Read on to see how Reg A+ may help your business raise equity capital for startup or expansion…
Will Equity Crowdfunding Destroy The VC Hegemony?
Until now, contributors to crowdfunding campaigns got little for their money. Most campaigns are either charity or rewards-based. You could feel good about giving ten bucks to a bullied school bus monitor; even better when she uses $100,000 of the $703,000 that well-wishers gave her to start an anti-bullying nonprofit. Alternatively, a campaign may offer a coffee mug, t-shirt, or other swag for different levels of donations. Product-development fundraisers typically let contributors pre-order the product at a discount.
Sometimes contributors feel a bit cheated. OculusVR raised $2.4 million via Kickstarter to bring its virtual reality headset to market. Funders got prototype headsets or kits to assemble themselves. Two years later, Facebook paid $2 billion for OculusVR, and a number of crowdfunders cried foul.
I see that as sour grapes, because the backers got exactly what they were promised. But equity crowdfunding would have made everybody happy; instead of a half-baked VR headset, an investor could have had shares in Oculus and turned a very handsome profit. But SEC regulations restricted advertising of private equity placements to sophisticated, accredited investors, shutting out little people who might have a few hundred to a few thousand bucks to invest in The Next Big Thing.
Reg A+ allows companies to issue equity via crowdfunding, provided the companies meet specific standards. Two tiers of equity crowdfunding are defined in Reg A+. Tier 1 includes equity offerings of less than $20 million during a 12-month period, with not more than $6 million being shares held by existing investors or their affiliates. Tier 2 increases those limits to $50 million and $15 million, respectively, but adds more disclosure requirements.
Why, yes, of course there are disclosure requirements, plus regular financial reports to file with the SEC. But Reg A+’s requirements are much less burdensome and expensive for companies. Still, regulatory burdens are something a small business must factor into its budget.
Equity crowdfunding could not come at a better time, IMHO. Individuals’ direct participation in stock markets is at an all-time low; most people put their retirement dollars into mutual funds and pay – often too much – to let professionals deal with the wolves of Wall Street. Reg A+ will allow individuals to bypass the perceived “rigged game” and deal directly with entrepreneurs.
Kickstarter and Indiegogo, the two heavyweights in crowdfunding, are still mulling how to implement Reg A+ equity crowdfunding. Crowdfunder.com is already offering equity crowdfunding. Founder Chance Barnett (whose first name ironically echoes the risky business he’s in) started the company in 2011 to open up new streams of funding that don’t flow through the bottlenecks of finicky, fickle venture capital firms. He predicts that equity crowdfunding will eventually dwarf venture capital funding by a margin of 10:1.
Of course, there’s no guarantee that your investment of $500 in an awesome crowdfunding project will turn into $50,000. You’ll more than likely have to shuck quite a few $500 oysters before finding the pearl.
Before diving into the Reg A+ equity market with a significant chunk of cash, individual investors need to do some homework. A good place to start learning is the “Resources” section of the National Crowdfunding Association.
Would you invest in a startup company via crowdfunding? Your thoughts on this topic are welcome. Post your comment or question below…