At its core, crowdfunding is the process of raising money to fund a venture through multiple small contributions from a large number of people. You’ve heard of some of the projects: the video game that has raised more than $117 million to date after starting with a $2.1 million Kickstarter campaign. A better beehive that brought in $12.4 million on Indiegogo. This very magazine, which got its start through a similar campaign generating $16,000.
But until recently, businesses could only reward their donors with gifts or products (see “4 Types of Crowd- funding,” page 71), not a piece of the business itself. That’s all changing thanks to a law that promises to shake up the crowdfunding world as we know it. On May 16, 2016, Title III of the 2012 Jumpstart Our Business Startups Act (JOBS Act) made equity crowdfunding available for the first time to unaccredited investors.
Sounds Great! What Does It Mean?
Title III of the JOBS Act permits everyday people to become investors in private businesses. Using third-party platforms such as online portals to facilitate transactions, companies can now raise small increments of money from anyone in exchange for small pieces of company ownership. This is a huge deal.
For more than 80 years prior to this provision, only accredited investors — those with a $1 million net worth or who make $200,000 or more per year ($300,000 as a couple) — could invest in private companies. Thanks to Title III, companies across the US will be able to raise capital from ordinary Americans in exchange for equity without having to put their offering on public stock markets. That hasn’t been true since the 1930s.
Why Is This Such a Big Deal?
Equity crowdfunding opens up an entirely new avenue for entrepreneurs to raise capital. In theory, Title III should make raising capital easier and more time-efficient by greatly expanding the pool of potential investors. Equity crowdfunding also benefits everyday people who can now get in on investment deals that had been relegated to only wealthy individuals for the past eight decades.
How do I get involved?
Read our interview with Wefunder president Mike Norman for more information about how this new crowdfunding works.