Traditional crowdfunding platforms, such as Kickstarter, Indiegogo and Patreon, operate on rewards-based systems whereby retail investors contribute cash in exchange for gifts, products, or discounts. Equity crowdfunding, on the other hand, is a method of investing into private companies in exchange for equity. It allows startups to raise funds from and pitch to a crowd of small, individual investors through internet-based platforms with built-in regulatory and legal compliance. While smaller, retail investors may not be able to make a significant impact on a stand-alone basis, when pooled with other like-minded investors, their financial contribution is magnified. Investing in one mission together with others of a similar mindset, the community can generate media and raise capital at a sufficient scale to accelerate growth. As a bonus, these platforms open doors for startups to connect with investors globally. Furthermore, equity crowd funders are not required to be accredited investors. Equity crowdfunding is thus considered less expensive and less time consuming than other ways of raising funds.
What are the Risks and Benefits?
Equity crowdfunding platforms are not an automatic assurance for investment. Investors still must conduct due diligence and startup founders still need to ensure foundational aspects are in place before seeking investments. These portals are designed to provide startups with additional platforms to engage a wider audience, and to protect retail investors by requiring startups to have undergone a light form of business diligence at their own expense before the first issuance of equity is permitted.
Another advantage of equity crowdfunding platforms is that they can provide opportunities to sponsor conferences, arrange webinars and facilitate introductions between investors and entrepreneurs. In the current virtual format, this can be accomplished with high resolution and speed over digital media. Additionally, crowdfunding platforms provide a variety of forums for discussions and dissemination of marketing literature and content.
There are also downsides. With a population of retail investors who invested in your company and who cannot necessarily afford to lose the money underlying their investment, you are at a greater risk of negative publicity if your business disappoints in any way. Apart from personalized and often strongly worded letters, emails, texts and posts, thousands of angry investors could mean a tidal wave of negativity, media, and even potential class action lawsuit.
Does Crowdfunding Really Save Time and Money?
A benefit of the JOBS Act is that allows entrepreneurs to bypass lengthy public filing requirements that would normally come with a registered initial public offering. While indisputably less expensive and quicker to prepare, there are nonetheless abbreviated and streamlined compliance requirements to observe. Four years after the JOBS Act was signed, Regulation CF of the JOBS Act was promulgated by the Securities and Exchange Commission. Companies are limited to raising an aggregate amount of $5 million in a 12-month period through equity crowdfunding offerings. The $5 million cap was recently raised from the $1,070,000 annual cap on Regulation CF. This is something that would not apply if a company chose to go with venture capital or angel investment options. Companies are still able to seek out other forms of financing, so there is an option to raise additional funding if needed from other more traditional avenues of funding. Additionally, Regulation CF requires all transactions to take place online through a Securities and Exchange Commission registered intermediary, either a registered broker-dealer or a qualified funding portal. There is also a limit to the amount of individual non-accredited investors who can invest across all crowdfunding offerings in a 12-month period.
