It took until May 2016 for equity crowdfunding to be legal in America for ordinary (or, “non-accredited”) investors, with the JOBS Act finally coming into force. Since then, the largest American equity crowdfunding platforms have been hard at work. WeFunder has helped raise $85 million, while StartEngine has been responsible for funding over 250 early-stage ventures.
The Risks & Opportunities Of Equity Crowdfunding
In contrast to Kickstarter campaigns, equity crowdfunding sees people investing in the company in question. So, rather than receiving that widget once it has funded – with equity crowdfunding, the crowd can become shareholders in the widget company.
Equity crowdfunding startups are often quite early-stage. They are generally past being pre-revenue or pre-product, but may still be at a point where their long term prospects aren’t entirely proven. Getting in on the ground floor of risky startups used to be the exclusive preserve of the rich – you had to be an “accredited investor” – which is jargon for having a certain level of net worth or professional expertise, before being allowed to invest your own money in companies like these.
But with high risk can also come great reward. Imagine being one of the early investors in Facebook, getting the chance to invest in the same terms as Peter Thiel in 2004, back when Facebook was still just a scrappy young startup… and then get to share in the outsized returns when it became the global behemoth that it is today. Equity crowdfunding makes this entirely possible. It can also help more “main street” kinds of businesses too – the type which has always struggled to attract VC money. And, the investment need not be significant – it is possible to invest as little as $25 on specific equity crowdfunding sites.
The fact that people are investing in shares of equity also opens up this type of crowdfunding to new business models, beyond what Kickstarter makes possible. Kickstarter only really works for consumer items which can be quickly shipped in the mail – travel accessories, gadgets, and board games being examples of favorite Kickstarter projects. But with equity crowdfunding, a founder can additionally fund a B2B company, or one that does services, or high-priced items such as vehicles.
The Overseas Leaders
As previously reported by The Scope Weekly, equity crowdfunding has been going on for quite some time overseas. There are large, developed markets in most countries in Northern Europe – particularly in the United Kingdom, where the two largest platforms; Crowdcube and Seedrs, have facilitated £626 million and £523 million of fundraising, respectively.
But equity crowdfunding has been slow to arrive in America. The reason for this is to do with the fact that equity crowdfunding is an offering of securities – meaning that it is regulated by the Securities & Exchange Commission.
One would have thought that the United States – the home of Silicon Valley – would be an early adopter of any innovations in startup financing. But the wheels of the US Government are slow-moving.
The Arrival Of Title III Crowdfunding
Since then, the United States has been playing catch-up. American startups and growing companies can use Title III crowdfunding to raise up to the amount of $1.07 million per year (a number which rises annually, with inflation) through the various platforms which deal with the technology and regulatory filings. These platforms host the startups in online marketplaces which resemble a sort of “Airbnb of early-stage investing.”
The largest American platforms include WeFunder, StartEngine, SeedInvest, and Fundable. Even Indiegogo, Kickstarter’s biggest competitor, has come out with an equity crowdfunding offering of their own. All of these platforms have different strengths and areas of specialty.
An American Success Story
Another of the early platforms is Republic, which was spun out of the well-known startup website, AngelList. Republic was host to Jane West, a cannabis lifestyle brand founded by a Colorado-based woman of the same name. When I spoke to Jane, she explained all the difficulties that her company faced when trying to get funded through traditional channels: “The capital markets here are just so tied up with conservative bankers… who hate weed.”
Beyond the professional investing class. Going to friends and family wasn’t an option either. “I was told that when I first wanted to start my business that I should just have a ‘friends and family [funding] round’ – just call up my friends and family and get $20,000 checks from them. And I was like: ‘OK, I don’t have anybody like that… so… what else do I do?”
Happily, through equity crowdfunding, Jane West was able to corral US$187,017 from her crowd. She admits that it was a heck of a marketing exercise which she learned a lot from. But despite all the work, West was very positive about the experience. “I believe that my company will do another equity crowdfunding raise in the future. I enjoyed it. It felt completely different than any of the other investment meetings I was doing, that’s for sure. Getting messages from people who just had invested only $25 about how excited they are about your future – that was wonderful, and helped build our following.”
Transforming The Relationship Between Company & Crowd
This opportunity to raise investment money, while simultaneously promoting their company is the thing that has got so many founders excited. Equity crowdfunding gives worthy companies from all walks of life access to crowd-sourced investment, allowing them to forge more direct relationships between themselves and their stakeholders. It is irrevocably changing the culture of investing, and the relationship between company and consumer to more of a partnership – fostering co-creation.
Keep an eye on the billion-dollar IPOs to list on the New York Stock Exchange and NASDAQ over the next few years. There is every chance that their origins will not have been funded by a venture capitalist hidden away in their ivory tower, but rather, through the collective power of the crowd.
About the author
Nathan Rose is the bestselling author of Equity Crowdfunding. He has appeared at crowdfunding events all over the world. Today, he runs the website www.startupfundingsecrets.io, to help startups and growing companies use equity crowdfunding to gain marketing exposure and raise investment money at the same time.