The Capital for Information About Crowdfunding Capital
In today’s post, I wanted to take some time to clarify who the major players are in equity-based Crowdfunding. I will start with the three main players – the Crowdfunding platforms, the investors and the entrepreneurs – and then explain the roles of some other players in the industry.
Over the past few years, it has become increasingly difficult for anyone who wants to start a business to raise money to get started. Banks are not lending to businesses without at least three years of profit, they do not have connections to investors, they are too small for investment firms like venture capital – there are many reasons why entrepreneurs have trouble, and most of the time, it has little to do with the viability of the idea.
The Crowdfunding exemption will give entrepreneurs access previously unavailable sources of capital, such as from normal, everyday, non-accredited investors. Entrepreneurs will use Crowdfunding to gain access to this additional capital from investors who were, before Crowdfunding, not able to invest in their businesses.
Prior to Crowdfunding, when reaching out to individuals, entrepreneurs could only ask what are called accredited investors, or individuals with a net worth over $1 million, not including their personal residences, or who make over $200,000 per year ($300,000 if including spouse’s income), or someone with whom they had a “substantial pre-existing relationship” with – i.e. friends and family – for money to start their businesses.
Now, with Crowdfunding, entrepreneurs can raise money from anyone, not just accredited investors or friends and family. That means that millions of people that were not allowed to invest in small, high-growth potential companies just because they were not wealthy enough, can invest in businesses in their local communities or in any business that they find interesting.
Now anyone can be a part of a startup, helping create jobs in their communities and livelihoods for hundreds and thousands of people. The investors in Crowdfunding businesses can be any normal investor now, not just the wealthy.
For more advice and educational material for investing in Crowdfunding, see my earlier posts in the Crowdfunding Basics category.
The Platforms (Intermediaries)
How do entrepreneurs connect with investors? That is where the Crowdfunding platforms come in. In order to be able to solicit their deal to investors in the general public, entrepreneurs are required to go through a registered Crowdfunding platform – not Facebook, not their websites – only through a platform. The platforms are where investors will create an account, get information about all of the businesses looking to raise money, keep track of their investments and get updates on how their investments are performing.
When an entrepreneur is ready to raise money, they will send their information to the platform. When an investor is ready to invest, they will be able to look for businesses they like on the platform. The platform is where entrepreneurs looking to raise money will connect with investors looking to help get them started.
You have also seen me refer several times to the SEC and to the JOBS Act. The JOBS Act was a bill signed into law in April 2012. It defines very general rules about how Crowdfunding should work – for example, that an entrepreneur can only go through an online platform to raise money, that they are limited to $1 million, the limits that investors have (see “How Much Can I Invest in Crowdfunding?”), and several other general rules. However, before equity-based Crowdfunding can begin, the SEC will have to take the general rules from the JOBS Act and make more well-defined, specific rules.
The JOBS Act gave the SEC 270 days to make those specific rules, after which point Crowdfunding will officially be legal. The 270 day deadline falls on January 4, 2013; however, many people are speculating that the SEC, being very busy these days, will miss the deadline by a few weeks or even a few months. Even if they hit the deadline, the platforms will still need to register with the SEC, which takes up to 45 days, as well as with another regulatory body called a Self-Regulatory Organization (SRO), which could take even longer. By the time all of this is completed, it is unlikely that anyone will be raising money through equity-based Crowdfunding from the general public until March 2013, at the earliest, and possibly not even until late 2013 or 2014.
Anyone who is considering raising money through equity-based Crowdfunding, please take note of that, as I would hate for you to expect to be able to raise money in January, as some platforms are leading people to believe, when you will likely not be able to until mid to late 2013, at the earliest.