As of this week, the lending landscape has changed once again. We've seen the rise and fall of bank lending, the rise and regulation of alternative lending, the stream of P2P lending, and now with a revision to a decades-old Securities Act of 1933, changes to the crowdfunding platform to allow equity crowdfunding, also called securities-based crowdfunding.
Why is it new?
In April of 2012, President Barak Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law. The goal is to make it easier and faster for small businesses to access capital. Title 3 of the JOBS Act focuses on equity crowdfunding for unaccredited investors, meaning that anyone can become an investor in a business, and share in its profits and growth, regardless of the investor's income, net worth, or expected financial gains in the future. Previously, only accredited investors were able to invest in a new business venture. An accredited investor is defined by the SEC as an individual whose net worth, or joint net worth with his or her spouse, exceeds $1 million, or alternatively, an investor who had income exceeding $200,000 in each of the two most recent years with reasonable expectation of earning the same in the current year. Changes to the equity crowdfunding regulations update the Securities Act of 1933 and Securities Exchange Act of 1934, so for the first time in 80 years, companies seeking investments from ordinary Americans can do so without the process of obtaining a full-public stock offering.
How equity crowdfunding differs from standard crowdfunding
Kickstarter, GoFundMe, and IndieGoGo are hailed as the top three crowdfunding sites that allow entrepreneurs, inventors, artists, and others supporting a cause to raise money online to fund projects and ideas. Typically an "investor," (it's really a donation rather than investment) receives a token of some sort in return--a tote bag, a certificate, recognition. Now, the exchange is funding for a piece of the business, of future profits. Investors are true investors. With access to non-accredited investors, start-ups can find quicker access to capital, achieving the goal the JOBS Act was created to achieve.
The cons of equity crowdfunding
Catherine Clifford, (@CatClifford) a staff writer for Entrepreneur, has covered crowdfunding extensively and produces a video series called "Crowdfunding with Cat." She writes, "as much as May 16 represents a finish line for the crowdfunding industry, it's also just the starting line." Clifford notes that the first startups to use equity crowdfunding will be essentially writing their own rules, because it's all new territory. With that will come success and failure, and the trick will be riding it out, and retooling the process to weed out future failure. Entrepreneurs are cautioned to heavily research the equity crowdfunding platform they choose, finding confidence in the platform's set-up and understanding how the platform manages investments in the start-up once the campaign is finished. On the flipside, investors are cautioned the same way. The early birds to the feast will have a pick at investment opportunities, but Clifford cautions, should have "a real stomach for loss." There will be opportunities early on that may not be available once equity crowdfunding becomes more mainstream. Diversification will be important for interested investors, so they're able to weather the storm of the failure rate for small businesses.
More ways to access capital
Celebrants of the JOBS Act are looking at the potential this new law brings. A rejuvenated flow of cash into small business startups is indeed great news, meaning opportunity for entrepreneurs and investors, overall impacting the economy's bottom line. But just as a small business owner is required to research, apply for, and properly plan for the spending of any capital that comes through a traditional loan or an alternative lending opportunity, learning the ropes of this new platform of lending will be an important part of the process for entrepreneurs. Venturebeat offers an in-depth 10-step process for getting involved in equity crowdfunding, from education to building your social network, to researching your investor platform, marketing, insurance, legalities, investor communication, and overall organization of your campaign. Once an entrepreneur has solidified his or her business plan, determining the best way to fund that business should take as much careful deliberation and research as the business plan itself. The additional platform of equity crowdfunding might help more entrepreneurs bring their dreams closer to reality. What are your thoughts on equity crowdfunding?