Equity Crowdfunding: Establish to evolve the whole world
We keep pretty close tabs on what's happening on the planet of crowdfunding, and as I read the various articles in major publications or see segments on TV news, I'm amazed at how little understanding there is about crowdfunding, and the vast differences between the donation-based crowdfunding that's been around for several years, and the equity-based crowdfunding that's on ab muscles near term horizon.
So let me set aside a second to attempt to explain. Donation-based crowdfunding is pretty simple. People effectively "donate" money to a company or cause with no expectations of ownership. In exchange, they receive some kind of tangible "award" for their donation and the awards usually can be found in tiers based on what much one donates. A tiny donation might result within an award of a bumper sticker or t-shirt while a big donation might garner a primary edition product, an all expenses paid weekend trip, or an invitation to an exclusive celebrity-studded launch party. These donation-based platforms, like Kickstarter and a huge selection of others, take a percentage fees from funds raised - generally 5-10%.
Equity-based crowdfunding, however, is an entirely different animal altogether, and frankly, a whole lot more exciting. Equity crowdfunding has the potential to fully turn the world of finance on its head, by giving everyday investors and small private companies direct access together - minus the financial intermediaries, who for many years, have essentially cornered industry on private investments, and have lined their pockets in the process.
The key difference in equity vs. donation crowdfunding is that investors get direct ownership in the company as a swap for their investments - be it shares of stock in a corporation, or units of ownership within an LLC Wefunder . So as opposed to a tshirt from the following iteration of business giants like Google, LinkedIn, Facebook, or Twitter, investors are certain to get to complement for the ride and share next wave of new business success (and yes, failure).
But additionally there are some significant caveats to raising capital through equity crowdfunding: most companies will need to create a company plan, an economic model or audited/certified financial statements, a valuation of the equity offering, and several other items before they can list their offering on a SEC-approved website platform. Another wave of new businesses is apt to be dramatically bolstered by this new access to capital. In place of a tiny pool of investors putting capital into new companies, there will soon be billions of men and women worldwide who are able to fund tomorrow's startups.
As things stand today, you will find already to significant changes to securities laws in the U.S. around equity crowdfunding -first, companies happen to be permitted to boost capital via equity crowdfunding from accredited investors (people with significant annual salaries or net worth). And, equity crowdfunders can advertise their deals to those accredited investors, a concept called "general solicitation" ;.This hasn't been allowed considering that the 1920's in the U.S.
The 3rd and final bit of the equity crowdfunding puzzle will soon be once the SEC unveils the rules for allowing equity crowdfunding to non-accredited investors. This will function as major pivot point where everyone will soon be permitted to invest in private companies. Providing the rules for companies to boost this sort of capital are not too cumbersome, this can be a BIG DEAL. Now what's much more fascinating is to attempt to predict and know what could happen once this third and final bit of the equity crowdfunding puzzle is put in position, and by all accounts, this will happen some time in the second quarter of 2014.
First, there has been a lot of infrastructure being built behind the scenes to organize for the events which can be now essentially upon us. Institutional investors are not dumb - many have already been pouring money into the portals and other businesses which will support equity crowdfunding. Others have already been taking care of creating secondary market for reselling crowdfunding investments which will supply the equity crowdfunding market and investors much-needed liquidity - making those investments much more appealing. And, it's not merely the institutional investors that are making bold moves. Social networking companies, media/publishers, and others have already been jockeying themselves into position as well by either buying equity crowdfunding infrastructure companies or developing capabilities in-house.
When you think back again to the rise of the non-public computer market in the 1980's and the emergence of the Internet in the mid 1990's, this sea change in the finance industry has the potential to be just like, if not more, prolific. The entire world forever changed in 1995 when Netscape developed the initial internet browser and made it freely available. It led to how many web users growing from 16 million at the start of 1996 to 360 million by the end of 2000. The share prices of the brand new firms that evolved, Yahoo, eBay, Amazon, Priceline, etc., who emerged to service the burgeoning population increased by as much as 100 times between 1996 and 2000. The exact same is likely to happen to companies who'll service the massive population of equity crowdfunding investors.