Crowdfunding is a method of collecting a large number of contributions, by means of an online funding platform, to finance or capitalize a business venture. Crowdfunding gained traction in the United States when Brian Camelio, a Boston musician and computer programmer, launched ArtistShare in 2003. It started as a website where musicians could seek donations from their fans to produce digital recordings, and has evolved into a fundraising platform for film/video and photography projects as well as music.
Rewards and Donation based Crowdfunding
Thanks to ArtistShare’s success, more rewards-based crowdfunding platforms were launched, the most prominent of which were Indiegogo in 2008 and Kickstarter in 2009. In addition to the arts (including fine art, comics, dance, design, fashion, film and video, music, photography, creative writing, theater), these sites host funding campaigns for social causes (animals, community, education, environment, health, politics, religion) and entrepreneurs and small businesses (food, sports, gaming, publishing, technology).
The Jumpstart Our Business Startups Act (JOBS Act) in 2012 created the concept of crowdfunding as an approach to raising capital for new projects and businesses by soliciting contributions from a large number of stakeholders. When originally enacted, there were three types of crowdfunding models:
(1) Donations, Philanthropy and Sponsorship where there is no expected financial return,
(3) Investment in exchange for equity, profit or revenue sharing. (SEC regulated Equity Crowdfunding)
CrowdProtector insures only the third category of crowdfunding, equity crowdfunding. Equity crowdfunding, specifically Title III of the JOBS Act, is a new way in which small businesses and startups can raise funding ($1,070,000 or less) from both accredited and non-accredited investors in exchange for an equity interest in the company raising money, the Issuer. The Securities Exchange Commission (SEC) was responsible for writing the fundraising rules and provide regulation to prevent this type of crowdfunding from becoming the “wild, wild west” of securities offerings. The SEC spent over three years to finalize the regulations to maintain the right balance between investor protection and enabling new opportunities for small businesses to raise money. The rules were released in November 2015 and were implemented on May 16, 2016.
Why Crowdfunding is Important
Crowdfunding is a massive new opportunity for early stage companies to access capital regardless of location. Crowdfunding follows the changes in consumer behavior where digital users are rapidly migrating to online marketplaces to purchase goods and services that were historically transacted offline. Crowdfunding is no different. Consistent with the transformation in travel, healthcare and banking services, equity crowdfunding, and the SEC rules that govern them, democratize what once was institutionalized.