How recent changes in crowdfunding regulations have opened up new opportunities for investors and small to mid-sized companies to efficiently raise capital.
Equity Crowdfunding – Growing out of Infancy
To understand the significance of equity crowdfunding including recent changes that will have a huge impact on the investment marketplace for investors and early-stage companies alike, we must first acknowledge the specific constraints on capital formation stemming from the Securities Act of 1933 that equity crowdfunding seeks to address. At the same time, we should be aware that the latest key installment of these sweeping regulations, Title III of the JOBS Act, only took effect in May 2016. Equity crowdfunding is still in its infancy and we have we have only just begun to see the potential impacts that recent regulatory changes will have for startups and in the venture capital industry.
The JOBS Act has several provisions that make it easier for today’s entrepreneurs to raise money. Title II of the Jobs Act made it possible for companies to solicit the general public for investment capital for the first time in 80 years. This change finally made it legal for startups and smaller early stage companies to actively solicit business by way of advertising to the public rather than being limited to dealing with investors with whom they had a pre-existing relationship.
Real estate investment crowdfunding was the first industry to really embrace this new investment class. Early crowdfunding platforms like OurCrowd took the opportunity to jumpstart an entirely new industry, and others like “Patch of Land” reported having facilitated more than 500 investments totaling over $300 million. Others in this early-lucrative niche include EarlyShares on the commercial real estate side, and PeerRealty which specializes in multi-family residential real estate. Already, the largest crowdfunding portals represent almost every major industry – from residential and commercial real estate, to high-tech, innovative consumer products, and now the multi-trillion dollar energy industry with the recent Reg CF approval of EnergyFunders.com in January of 2018.
It wasn’t until Title III of the JOBS Act was enacted, however, that equity crowdfunding actually opened the doors allowing non-accredited investors to buy private securities alongside their more financially-empowered accredited counterparts. The welcoming of non-accredited investors to the table represents the formation of an entirely new revenue class to provide financing for entrepreneurs. There really is no limit to the number or scope of opportunities that will be made available over the next several years. Opportunities that had been formerly available only to those with the right connections and financial qualifications have just been opened up to investors large and small. Equity crowdfunding platforms are providing access for startups to reach thousands of potential investors all at once, as they are now available to be legally advertised to accredited and non-accredited investors alike.
The Barriers to Wealth Creation are Coming Down
The SEC has brought more than a dash of equality into the investing world recently. While the barriers to wealth creation are not disappearing, they are undergoing substantial reductions. Due diligence and solid information gathering are critical. It’s incumbent on the crowdfunding platforms to provide transparent information about the officers and each company’s background and business. As always, it’s up to each investor to do their homework.
Investor eligibility and minimum investments vary tremendously from one platform to another. Each equity crowdfunding platform may offer a slightly or dramatically different model depending on the rules which they utilize. Some take pledges, others act as intermediaries between investors and companies, and others act as issuers. One of the largest equity crowdfunding platforms, AngelList, operates funds that own shares in multiple companies or across asset classes. Some of their “deal by deal investments” and funds have hefty minimum investments that effectively put participation out of reach for the average investor, while others like SeedInvest and EnergyFunders offer lower thresholds to entry.
Investing in the Age of the Internet and Social Media
Powered by the internet and the ubiquitous age of social media, equity crowdfunding’s evolution is inevitable. The category has certainly seen its share of winners and losers, and social media makes it easier to connect investors with capital while platforms provide the access. Platform-specific projects and niches are popping up everywhere and the industry is just getting started.
As the world changes, the variety of investment opportunities will continue to evolve and shift, but that doesn’t mean the onus of due diligence is removed from the shoulders of the investor. It does mean that the investment marketplace will continue to diversify and provide more opportunities to assemble a diversified portfolio even as it allows access to any number of potential grand slam startups, innovative technologies, and even new ways to lend a hand to important social and humanitarian causes.