The biggest names in crowdfunding, like Kickstarter and Indiegogo, have focused largely on donation-based crowdfunding (think personal pleas to cover medical costs, fundraising for a charity goal, or donations to help start a business). In exchange for money, the donor receives personal satisfaction or perhaps a reward T-shirt or product sample. Recent groundbreaking regulatory changes, however, may soon allow crowdfunding platforms to offer equity crowdfunding to average citizens. Using equity crowdfunding, also called investment crowdfunding, startups and private companies can raise money directly from small investors through online platforms. Instead of a t-shirt or mug, investors receive ownership shares, or equity, in the startup.
In a 2015 report titled, “The Future of Finance.” Goldman Sachs Group, Inc (GS) described crowdfunding as “potentially the most disruptive of all the new models of finance globally.’’ And Indiegogo co-founder Slava Rubin described equity crowdfunding as the “Holy Grail” in a July 2015 interview with "The Huffington Post." Equity crowdfunding is poised to revolutionize the way companies are funded and disrupt the traditional private equity, banking and venture capital industries if regulatory hurdles can truly be overcome.
Accredited Investors Only
Currently a number of U.S. crowdfunding sites offer equity crowdfunding, but limit participation to accredited investors. These are financially sophisticated individuals who need less protection in the view of the U.S. Securities and Exchange Commission (SEC). To qualify as an accredited investor an individual must have a yearly income of over $200,000 or a net worth above $1,000,000. The reasoning behind the SEC restriction is to protect average workers and less savvy investors from financial ruin as a result of investing in risky private companies. Laws relating to equity crowdfunding vary by country. In the United Kingdom, where the laws are less restrictive, participation in equity crowdfunding by the general public is already taking place. In the United States recent changes in legislation are moving towards democratizing equity crowdfunding by allowing everyday citizens (or non-accredited investors) the chance to invest in startups and small businesses.
The framework for making this possible began after President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law in 2012. The JOBS Act aims to create cost-effective access to capital for companies of all sizes. In June 2015, Title IV (Regulation A+) of the JOBS Act was enacted, which allows startups to raise up to $50 million from non-accredited investors, subject to a number of provisions. Non-accredited investors are restricted to annually investing up to 10 percent of their income or net worth.
While equity crowdfunding has now been opened to a wider pool of participants in the United States, a number of restrictive SEC guidelines are still in place that make it difficult for startups to raise capital from unaccredited investors. For example, companies are required to file their offering with every state in which they offer equity and must also provide audited financials. These requirements represent a prohibitive expense, especially for small companies. Participants in equity crowdfunding are now looking eagerly to October 2015 when the U.S. Securities and Exchange Commission plans to finalize Title III equity crowdfunding regulations and the Title IV Regulation A+ regulations from the JOBS Act. (See also: Crowdfunding Is Changing Financing For Tech Startups.)
In this article we’ll review five major players in equity crowdfunding to watch in the coming years.
Launched in 2010, San Francisco, Calif.-based AngelList enables startups to create a free profile and apply for funding online. Companies can accept investments as small as $1,000. AngelList syndicates, which are essentially groups of investors, allow accredited investors to co-invest along with prominent angel investors and access exclusive deals. At the time of writing, startups can only raise money from accredited investors on AngelList. In 2014, AngelList successfully raised $104 million for 243 startups from a total of 2,673 investors.
United Kingdom-based Crowdcube is free to join and allows anyone to invest in startup companies listed on the website. Investors on Crowdcube can participate by buying equity or by lending money to businesses through what the company calls mini-bonds, an investing vehicle that yield a steady fixed rate of income. Crowdcube uses the all-or-nothing model—a company seeking funding states a target sum up front and must reach the target or receives no funding at all. In other words, if the target sum is £100,000 and the campaign only raises £99,999, the startup company cannot collect any of the money and the investors keep their pledges. If the target is reached and the campaign is successful, Crowdcube charges a fee of 5% of total funds processed. Crowdcube launched in 2011. As of August 2015, the platform has hosted 198,246 investors, funded 283 businesses, and reached £99,273,958 funds raised. Crowdcube is authorized and regulated by the United Kingdom’s Financial Conduct Authority (FCA).
Launched in 2012, Seedrs is based in the United Kingdom's startup-rich East London area. The company offers an equity crowdfunding platform for investment in growth-focused companies. Users can participate by investing as little as £10 or €10. Like Crowdcube, Seedrs is an all-or-nothing platform in which an investment target must be reached in order for a company receive any funds. Companies pay a fee of 7.5% of the total funds raised if the fundraising campaign is successful. Seedrs was the first equity crowdfunding platform to receive regulatory approval from the Financial Conduct Authority in 2012.
Powell, Ohio-based Fundable provides a fee-based platform for both rewards-based and equity crowdfunding. At the time of writing, only accredited investors can participate in equity crowdfunding on the platform. The company launched in 2012 and in its first year generated over $80 million in funding from investors. To date, Fundable has facilitated $204 million in funding. Fundable currently charges companies a fixed monthly fee in order to participate in fundraising.
Launched in 2005, Arkansas-based EquityNet is among the oldest players in the crowdfunding business. The platform allows entrepreneurs to publish a business profile and optimize their business plan. Entrepreneurs can then browse investor profiles and seek funding from angel investors. Meanwhile, investors are also able to create a profile and browse and analyze investment opportunities. As is the case with other U.S.-based equity crowdfunding websites on this list, EquityNet is currently restricted to accredited investors only. At the time of writing the platform has hosted 17,585 companies and 21,962 investors and has achieved $342,659,900 in funds raised.
The Bottom Line
The juggernaut of crowdfunding appears unstoppable. According to a recent report by research firm Massolution, crowdfunding raised $16 billion in 2014, and will likely raise $34 billion in 2015. Equity crowdfunding is poised to revolutionize the way companies are funded and disrupt the traditional private equity, banking and venture capital industries if regulatory obstacles can eventually be overcome. (See also: What Crowdfunding Means To Investors.)