What is Equity Crowdfunding?

Learn about crowdfunding and how it helps businesses grow. Discover the different types of crowdfunding and how to get involved.

You’ve probably heard the term “crowdfunding” before, likely in the context of a Kickstarter campaign or a GoFundMe page. At the most general level, crowdfunding refers to a financing model in which small sums of money are collected from a large pool of people (the crowd).

Crowdfunding is the process by which a large number of individuals make small monetary contributions into a single pool, ultimately funding a new venture or project. Early forms of crowdfunding can be traced back to the 17th century with popular application during the cooperative movement in the 19th and 20th centuries.

Crowdfunding is an evolving method of raising money through the Internet, but it has generally not been used to offer and sell securities. That is because offering a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and an offer or sale of securities must be registered with the SEC unless an exemption is available.

So you’re interested in raising capital through Regulation Crowdfunding but want to learn more before taking the plunge? Then this article can help you learn the basics and hopefully answer some of your questions along the way.

For the last 80 years, private companies could only raise capital from accredited investors, the wealthiest 2% of Americans. On April 5, 2012, President Obama signed a landmark piece of legislation called The JOBS Act, allowing entrepreneurs to go to the crowd and publicly advertise their capital raises. On May 16, 2016, four years after the JOBS Act was signed, Title III (aka Regulation CF) of the JOBS Act went into effect, allowing private early-stage companies to raise money from all Americans. Startups can now use equity crowdfunding to turn their customers into investors.

As of May 16, 2016, anyone—not just accredited investors—can invest through crowdfunding platforms. This means that ordinary individuals, in theory, have the ability to invest in start-up companies that used to be the stuff of angel and VC investors only. Of course, restrictions apply and there is a far greater degree of risk - and potential reward - with early stage companies.

Congress passed the Jumpstart Our Business Startups (JOBS) Act way back in April of 2012 — and the startup world rejoiced. Finally, we’d be able to raise money through non-accredited investors, just like all of our friends were doing to pay for their EPs and trips to South America and medical procedures! Crowdfunding — which the startup world invented — was finally a legal option for startups.