Original text published by CrowdRabbit
Beginning on June 19, non-accredited investors will be able to buy equity in private companies through equity crowdfunding platforms – a major change in crowdfunding in the United States. Other than a handful of industry insiders, securities lawyers and regulators, few people know how we got to this point. This post describes the short history of equity crowdfunding in this country.
The term “crowdfunding” refers to all efforts to raise small amounts of money for a business or project from a large number of people usually through an online process. Crowdfunding usually takes one of four forms: donations, rewards, lending and equity.
Donations-based crowdfunding involves efforts to raise no-strings-attached money from the crowd, usually for a good cause. Rewards-based crowdfunding means raising money by offering people a benefit in return for their money, such as a product or a musical recording. Lending-based crowdfunding involves borrowing money from (and paying interest to) others. Equity-based crowdfunding means selling shares in a business to members of the crowd. While all of these are relatively new developments, the newest of all is equity crowdfunding.
The success of donation- and rewards-based crowdfunding platforms, like Kiva and Kickstarter, led financial entrepreneurs to establish the first equity crowdfunding platforms in the United States in 2011. Their goal was to improve the inefficiency of off-line efforts to match investors and businesses seeking funding. Given the state of regulation at that time, the first U.S. equity crowdfunding platforms were established under Regulation D of the Securities Act of 1933. Two of the best known of the “Regulation D” platforms are MicroVentures, formed in 2011, and CircleUp, created in 2012.
Regulation D platforms were cumbersome creatures, and not very well-suited to true equity crowdfunding. These platforms could only sell equity to accredited investors – individuals with an annual income of $200,000 per year or a net worth of $1 million or married couples with an annual income of $300,000 per year or a net worth of at least $1 million. Moreover, entrepreneurs raising money through these platforms could not solicit investors or advertise their offerings.
In April 2012, Congress passed the Jumpstart Our Business Startups (JOBS) Act, which, among other objectives, was designed to make equity crowdfunding easier to undertake. The passage of the law spurred several new equity crowdfunding platforms to form and for some platforms providing other types of crowdfunding to begin to move into this space in 2012.
However, before these platforms could actually operate, the Securities and Exchange Commission (SEC) had to write the rules that would govern their operations. That process was far slower than many in the entrepreneurship community had hoped. By September 2013, the SEC produced only the rules that would allow those raising money to advertise their efforts.
While this shift was a big improvement, there was also a catch. Those entrepreneurs soliciting investment had to limit their offerings to accredited investors and had to “take reasonable steps” to verify that investors did meet the accredited investor criteria. These limitations held back true equity crowdfunding, as many had envisioned it.
The slow efforts of the SEC to write further rules led some observers to worry that the regulatory agency did not want to extend crowdfunding to non-accredited investors. However, those worries proved unjustified in the end.
In March 2015, The Securities and Exchange Commission finished writing the final set of equity crowdfunding rules under the JOBS Act. The new rules, which go into effect on June 19, make it possible for non-accredited investors to buy shares in startups through equity crowdfunding platforms. Four years after the first efforts were made to create online platforms to match entrepreneurs and equity investors, business owners can now solicit and receive investments from non-accredited investments through online platforms.