Learn why equity crowdfunding will be a major form of financing in the near future
A lot has been said about new government regulations regarding crowdfunding – particularly equity crowdfunding – but little attention has been given to the fact that those regulations are, in fact, paradoxically, deregulating investors requirements.
In the United States, many securities options unregistered with SEC are available only to accredited investors, people who can bear the risks of losing most or all of their money, without risking running out of funds for their basic survival. According to SEC themselves, that includes people with a net worth of over $1 million or who earned $200,000 or more in the previous two years, while expecting the same in the current year. The amount is raised to $300,000 per year if the individual is married.
Those unregistered securities include investments in startups and participation in real estate enterprises that include the issuing of unregistered securities – i.e., the investor is not owner of the property in the beginning, but instead holds a title that grants him income or future participation in the business, usually in the form of convertible bonds.
Raising money that way was always a tricky task. An entrepreneur should design a well structured business plan and pitch to a few accredited investors about the opportunity, usually real estate developers or venture capitalists. The whole process could be lengthy and very detailed, since usually large sums of money, at least 6 digits for most projects, were required.
That was the way of doing business in the past and still the way most equity investments are done today. But after the initial success of crowdfunding, however, many people saw the opportunity to reach out to hundreds or even thousands of people to raise money for their projects. The investors do not need to commit large sums (actually, for most projects, a few hundreds or thousands of dollars are the norm), so the total risk is significantly reduced. Investors can also spread their investments in a number of different projects, so they can be more confident that one of them will actually succeed.
For entrepreneurs, the task of raising money is greatly simplified. They do not need to dig in so many details about their business plans. Their project will not be necessarily doomed if a big investor decides to bail after a few months of negotiation. Usually, the investor must do a good pitch on a good crowdfunding platform and see if, within two or four weeks, the public buys the idea.
The small amounts involved made people question the need to be qualified as an accredited investor to participate in such projects. After all, most people won’t go broke if they invest as little as a couple hundreds of dollars. Noticing that, several state bodies started passing regulations (actually simplifying existing regulations) to allow common people to invest in startups and real estate projects via equity crowdfunding. That ended up inspiring the JOBS Act (Jumpstart Our Businesses Act), a federal regulation in the United States to allow this type of investment in the whole nation and ended up on the regulation of Title IV just last May.
Elsewhere in the world, regulatory bodies have taken action as well. China sees equity crowdfunding as a way to increase their GDP growth, so they have been pushing to allow small players to invest. Malaysia has also registered some platforms, allowing them to negotiate securities. And six provinces in Canada have reached common grounds to allow investment via crowdfunding.
Keep on reading our blog, as we are tracking news on equity crowdfunding regulations and will be updating on the developments that are making this form of financing more pervasive.