Rewards based Crowdfunding has already established itself as a viable investment scheme. Websites such as Kickstarter have been successful in allowing individuals to donate dollars in exchange for rewards. However, these investors have not been allowed to exchange dollars for equity. This will change as soon as the SEC issues final regulations on Equity Crowdfunding.
Equity Crowdfunding will allow a large group of people to fund private companies with smaller dollar amounts in exchange for real stake in the business. From an investor standpoint, Equity Crowdfunding provides a unique investment opportunity. Unaccredited investors will be able to participate in an investment market that has traditionally been open only to high net worth individuals.
Opponents claim that the crowd lacks the sophistication and expertise to identify and invest in credible ventures. The fear is that Equity Crowdfunding will invite opportunistic scammers to take advantage of the general public. While the concern may be genuine, such assertions are patronizing and not entirely valid. The SEC is close to issuing final regulations on Crowdfuding. These regulations will include several procedural and substantive safeguards to protect investors.
Issuers will have to meet fairly rigid disclosure and filing requirements. Investors will be able to access issuers’ financial and business information before making any investment. There are also caps on investment, particularly on investors whose income is less than $100,000/year. Furthermore, one must not discount the power of collective thinking and social media in vetting investment opportunities. The ability to communicate en masse and share information will facilitate pre-investment due diligence.
Entrepreneurs and small business will also benefit from access to crowdfunded capital. Such benefits are not limited to fundraising. In the process of raising capital, entrepreneurs will be able to interact with the crowd, promote their business, and build a customer base. This does not mean that Equity Crowdfunding is easy or inexpensive. Initially, compliance and disclosure costs might impose a financial burden. There are no guarantees that every business will be able to raise sufficient capital. However, such costs and risk are inherent in any profit-making venture and must therefore not preclude an aspiring entrepreneur from pursuing Crowdfunding opportunities.
Equity Crowdfunding provides a promising platform to promote business growth. Innovation and small businesses are central to national economic growth, and it is only a matter of time before the general public embraces this idea.