What is Crowdfunding?
Crowdfunding, in its simplest definition, is bringing together a large number of investors to financially support businesses or projects. In lieu of traditional forms of financing such as venture capitalist, bond markets, stocks markets or bank loans, crowdfunding allows business to raise capital inexpensively and easily from hundreds or even thousands of average Americans who can invest or donate as little as $1. The funding can be considered a loan, a donation or an equity investment in the company. While this practice previously existed, the return to investors was generally in the form of a goods or services.Crowdfunding, in its simplest definition, is bringing together a large number of investors to financially support businesses or projects. In lieu of traditional forms of financing such as venture capitalist, bond markets, stocks markets or bank loans, crowdfunding allows business to raise capital inexpensively and easily from hundreds or even thousands of average Americans who can invest or donate as little as $1. The funding can be considered a loan, a donation or an equity investment in the company. While this practice previously existed, the return to investors was generally in the form of a goods or services
What is Equity Crowdfunding?
Equity crowdfunding is a type of crowdfunding where the investor receives ownership (i.e. “equity”) in the company in exchange for the investment. Equity crowdfunding is different from donation-based crowdfunding sites, like Kickstarter, where backers only receive a product or service gift from the company, not company ownership. Most recently, the term Equity Crowdfunding (in the US) has become directly associated with Title III of the JOBS Act, wherein a company can raise up to $1M from non-accredited investors and accredited investors.
What is the JOBS Act?
In April of 2012, President Obama signed The Jumpstart Our Business Startups Act (JOBS) of 2012. Title III of the JOBS Act provided a registration exemption for limited-size offerings to be sold in small amounts to a large number of investors possible through the Internet. It was intended to encourage funding of United States small businesses by easing the various securities regulations.
How much can I invest?
Crowdfunding donations or investments can be as little as $1, but there are limits imposed. Like stocks and bonds, anyone can invest in crowdfunding offerings. Under the JOBS Act, unaccredited investors in SEC regulated equity crowdfunding are limited in how much you can invest during any 12-month period in these kinds of securities because of the risks involved. The inflation-adjusted investment limits depend on your net worth and annual income: An investor with annual income or net worth below $100,000 can only contribute a maximum of $2,000 or 5% of the investor’s annual income or net worth. For an investor with annual income or net worth above $100,000, the aggregate annual investment in crowdfunded securities is capped at 10% of the investor’s annual income or net worth. State regulated crowdfunding regulations may allow for different limits for unaccredited investors.
The following table provides a few examples:
What are the benefits to small businesses?
With traditional financing from banks and/or securities markets, small businesses have to file lengthy forms and provide extensive financial documentation. The forms may require businesses to retain legal and specialized investment adviser help, none of which comes cheap. Of greater concern is that non-compliance with regulation leaves start-ups vulnerable to a huge penalty by stopping them from fundraising for one year– a death sentence for any fledgling enterprise.
What is limitations on Crowdfunding raising?
A number of limitations on crowdfunding are included in the law, including:
Small businesses must have revenues of less than $5M and are not foreign corporations, public or investment companies;
Small businesses are not permitted to sell up to $1 million of securities in any rolling 12-month period, provided the issuer has met certain such requirements as initial and periodic disclosures to the SEC; and
Each investor may not purchase in excess of $2,000 or a percentage of such investor’s annual income or net worth, up to a maximum of $100,000.
Where is Crowdfunding available?
Crowdfunding is available all over the world. Equity crowdfunding exists in many countries including the US thanks to the JOBS Act. Equity crowdfunding's popularity in other countries is significant. In 2017, over 20% of all early-stage companies in the UK where crowdfunded.
How many equity crowdfunding platforms are there?
There are well over 2000 crowdfunding platforms worldwide, and growing. In the US, there are 42 crowdfunding plaforms that regulated by the SEC/ FINRA and allow non-accredited investors to participate. There are signifcantly more that allow only accredited investors.
State-regulated equity crowdfunding?
As of August of 2017, the thirty-six (36) states have either enacted separate intrastate crowdfunding exemptions or have enacted amendments to their existing blue sky laws to permit some type of intrastate crowdfunding. These exemptions are statutes recognizing that equity crowdfunding, done responsibly, with appropriate disclosure and safeguards, may be another valuable tool that small companies can use to raise capital. Another eight (8) are in the process of file for an exemption that allows for state-regulated crowdfunding. This is known as the Intrastate Crowdfunding Exemption.
What are the risks?
First off, where there is money to be made, like any investment, there is a possibility of a partial or total loss. Beyond this, some observers are concerned that the ease in raising capital in a crowdfunding offering may also increase the risk of fraud. Other concerns include:
Does the business have experience in the field?
Are the managers experienced in running a business?
Do the managers have skin in the game?
Does the business have a prototype?
Is there an endorsement from a prominent organization or individual?
Will the business raise enough money to fund the project and what happens to the money raised if it never gets off the ground?
These are the typical factors that increase the chance a company being successful.
Whats the difference between a Funding Portal and a Broker Dealer?
Two kinds of intermediaries may conduct (Title III) equity crowdfunding offerings and transactions: (1) funding portals that are not registered broker-dealers, and (2) offering platforms that are registered broker-dealers. A broker-dealer can be an individual or a company. Broker-dealer platforms are authorized to do, while funding portals (which are not owned or operated by broker-dealers) are prohibited from doing, the following:
Offer investment advice or recommendations to investors.
Solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal.
Compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal.
Hold, manage, possess, or otherwise handle investor funds or securities.
Why do I need TigerMark™?
Trust, confidence, and protection is important for transactions and markets work long-term. TigerMark not only protects the companies raising capital from unnecessarily angry investors but also gives investors confidence that if that issuer (the company raising money) acts wrongfully, they have an ability to get their principal investment returned. Check with participating crowdfunding platforms for specific language.