Crowdfunding has become a central part of the modern economy; anyone with a project or a problem can set up a site and draw on community support to fund it. This model has been wildly successful, helping many companies get off the ground, but for startups with greater opening costs, it’s also an unrealistic structure. These companies call for a more traditional investment structure, and these private investors need to have deep pockets.
Between crowdfunding and more traditional forms of investing, there remains a gulf, however, and it’s one that keeps upper-middle class Americans from becoming investors – and that’s what equity crowdfunding is aiming to change. A new take on an old model, equity crowdfunding is lowering the entry cost for those who want to invest in startups.
Investing In Startups: The Old Model
In the past, if you wanted to have an equity stake in a startup, the financial requirements were pretty high: you’d need over a million dollars in assets or over $200,000 in annual income. While this isn’t an excessive lower limit for many investors, in a culture that so highly reveres the ingenuity of the startup, it does keep a lot of interested parties out.
Those falling below the cap were then relegated to crowdfunding, where a financial offering doesn’t create a meaningful stake in the resulting business. It’s a donation, not an investment – and this creates an unfair split between the two key groups that support new companies.
Enter Equity Crowdfunding
In an effort to level the playing field between potential investors, several factors needed to come together. First, equity crowdfunding is founded on 2012 legislation signed by Obama known as the Jumpstart Our Business Startups (JOBS) Act. And though it was signed four years ago, it’s taken time to hammer out the logistics of small-scale equity investing at the regulatory level – hence the delay.
From there, the JOBS Act needed logistical support from crowdfunding operations. Indiegogo stepped in here to support this mission, offering the platform that would allow companies to sell equity shares at a crowdfunding level. At this juncture, they seem to be the only ones; Kickstarter has been clear that they’re not interested in being part of equity crowdfunding.
Settling Stable Limits
One of the most important aspects of equity crowdfunding is that, although it lowers the income limit at which you can invest in a startup, it doesn’t eliminate it. Instead, the regulations follow the same rules of reason as other types of investing. For those making less than $100,000 a year, for example, you can’t invest more than $2,000 in startups per year, or 5 percent of your annual income. This is the same principle of fiscal conservatism that underlies penny stock investment. You don’t want to overextend your resources.
A Few Words Of Caution
Whether you’re an investor or an individual hoping to fund your business through equity crowdfunding, it’s important to approach this new process cautiously. We don’t yet know how successful equity crowdfunding will be, and whether it will be subject to many of the same failings as traditional crowdfunding.
It can be dangerous to try to launch your equity crowdfunding campaign on too small of a budget, for example, because resuscitating a company that’s already begun to slow is much harder than maintaining momentum. Don’t assume, then, that because people will invest, your budget will grow. If you can’t sustain yourself during those early phases, a little bit of money from the equity crowdfunding scene isn’t going to be enough.
It’s also important to do some research on the different platforms that will support equity crowdfunding. Right now, Indiegogo is getting most of the attention, but that doesn’t mean it’s necessarily the best option. New approved platforms are regularly being added to the list managed by the Federal Industry Regulatory Authority, so pay attention to additions as you seek the right fit for your company.