What is equity crowdfunding?
You’ve probably heard the term “crowdfunding” before, likely in the context of a Kickstarter campaign or a GoFundMe page. At the most general level, crowdfunding refers to a financing model in which small sums of money are collected from a large pool of people (the crowd).
Equity crowdfunding uses this same model, but instead of offering products or perks, funders receive a percentage of ownership, a financial stake in the company, or the right to future revenues or crypto-assets with an aim to earn a return.
How is it different?
There are essentially three kinds of crowdfunding: reward-based,
donation-based and equity-based.
Reward-based crowdfunding
Is when you contribute money and get a reward or product in return. This is mostly used for creative campaigns, and there are often different levels of rewards, or perks, that correspond to pledge amounts. Think Kickstarter and Indiegogo.
Donation-based crowdfunding
Is when a funder contributes to a campaign without expecting any perks or value in return. This is mostly used to fund charitable causes, like funding to build a well in Kenya, or personal expenses, like helping pay a friend’s medical bills. Think GoFundMe, YouCaring and CrowdRise.
Equity crowdfunding
Which includes accredited crowdfunding and open-access regulated crowdfunding.
Accredited crowdfunding allows companies to raise funds from high-net worth individuals and institutions. AngelList and FundersClub are two of the best examples of these platforms.
Open-access regulated crowdfunding invites anyone to invest in a company in exchange a slice of the financial pie, or the right to money or future crypto-assets (you may get perks too). Republic, StartEngine, and WeFunder are some platforms that host this type of crowdfunding.
What is Title III and why is it a big deal?
In the past, only accredited investors could invest in private companies. In theory, this was to protect everyday citizens from investing more than they could afford to lose, but this also meant that the majority of Americans were denied the opportunity to invest in startups at all. The change finally occurred in May 2016, when the U.S. Securities and Exchange Commission enacted Title III of the JOBS Act, often referred to as “Regulation Crowdfunding,” or “Reg CF” for short. Under Title III, the majority of the population could invest in startups for the very first time. The rules stated that 1) entrepreneurs can now raise up to $5 million in a 12-month period from non-accredited investors, and 2) investors can invest a limited amount per 12-month period based on their income and net worth.
Why we’re excited
Because more investors means more startups, and more startups means more innovation and progress.
Why you should be excited too
You now have access to vetted & screened companies
You can invest comfortable amounts as easily as you shop online
You can get involved in the exciting world of angels, entrepreneurs and startups