When Facebook announced in March 2014 that it was acquiring virtual-reality pioneer Oculus VR for $2 billion, the news caused jaws to drop throughout the tech industry. It also left at least a few of the 9,522 people who had contributed to Oculus’s Kickstarter campaign less than two years earlier grumbling that they should be cut in on the windfall.
Sorry, crowdfunders: The $2.4 million you put up via Kickstarter entitled you to posters, T‑shirts, and prerelease versions of the Rift headset, not equity participation in a landmark deal. But Oculus’s journey from crowdfunding phenom to blockbuster acquisition did get people asking a bigger question. Sites such as Kickstarter and its archrival, Indiegogo, have had a transformative effect on how startups bootstrap themselves. Why shouldn’t the masses be allowed to invest in new companies and have a chance at realizing a profit?
That pent-up desire has been particularly acute ever since President Obama signed the Jumpstart Our Business Startups Act in 2012. Better known as the JOBS Act, the law includes provisions designed to let startups use the web to sell equity stakes to large numbers of people. "For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in," the president explained. Last summer saw the first of the JOBS Act’s crowdfunding provisions take effect. And though one of the key parts of the law is still working its way through regulators, it may finally kick in next year.
Among the people monitoring the situation most avidly is Slava Rubin, the CEO of Indiegogo. When he began tossing around a concept for a company almost a decade ago with cofounders Danae Ringelmann and Eric Schell, it "was really about equity crowdfunding, before the word crowdfunding existed," he says. After concluding that the investment angle was unrealistic, they dropped it. It turned out that people would back campaigns out of sheer desire to help a promising project become reality—and the lure of getting a thank-you gift for their support. But that hasn’t stopped the Indiegogo community from asking. "People are regularly saying, ‘Can I invest? Can I invest? Can I invest?’" says Rubin.
For a site like Indiegogo, the implication of the JOBS Act’s equity crowdfunding mandate could be revolutionary. "It’s really democratizing not just access to capital, but also equity for people who are not professional investors," says Sam De Brouwer, cofounder of Scanadu, which collected $1.7 million on Indiegogo in 2013 for its smartphone-based health-monitoring gadget, then went on to raise more than $45 million from venture-capital firms. "It’s superinteresting." That is, if companies such as Indiegogo can make it work.
The door to equity crowdfunding finally swung open this past June with the implementation of the so-called Regulation A+, spurred on by the JOBS Act. It gives everyone access to investment opportunities that were formerly available only to "accredited investors"—people who earn $200,000 per year (or $300,000 along with a spouse) or have a net worth of $1 million, not including their primary residence. A handful of platforms, including StartEngine and SeedInvest, are already using the regulation to entice people to support projects such as an improbable-looking three-wheeled car called the Elio (currently soliciting funds on StartEngine). But for startups, the required paperwork is daunting. And until a company has gone through the entire regulatory process mandated by the U.S. Securities and Exchange Commission, it is only able to secure "nonbinding promises of interest" from potential investors. It remains to be seen how many startups will try this route.
It’s taken the SEC longer than anyone expected to hammer out Title III, the part of the JOBS Act that allows for broader-based equity crowdfunding. The matter has been stuck in limbo, but work on it is scheduled to resume this fall. In the meantime, Indiegogo is preparing for the possibility of helping entrepreneurs sell stakes in their new ideas.
That sets the company apart from Kickstarter, which states that it’s interested solely in helping worthy creative projects—such as movies, artisanal foodstuffs, and inventive gizmos—become reality. Judging them on their potential to turn a buck would sully that vision. Indiegogo’s mission is more all-encompassing, says Rubin: "Our North Star is that we’re trying to democratize funding." The company is happy to raise money for nearly any goal that isn’t illegal, dangerous, or a form of hate speech, including charitable efforts, paying for personal medical emergencies, and other activities that Kickstarter bans.
Still, the logistics involved with a site like Indiegogo getting into equity crowdfunding would be extraordinarily complex. "Facilitating regulated investments is very different from giving away T-shirts or hats or putting people’s names in the credits of a movie," says Ryan Feit, CEO of SeedInvest and cofounder of the Crowdfunding Professional Association. To ensure that its transactions meet SEC rules, Indiegogo might have to trade in its laissez-faire atmosphere for something a little more buttoned-down.
Turning crowdfunding campaigns into investment opportunities would also magnify the impact of any mishaps a company makes. In its current form, Indiegogo makes no attempt to vet the quality of campaigns or the competence of those who submit them, leading to occasional catastrophic failures such as Kreyos, a smartwatch company that raised $1.5 million in 2013. It collapsed before it had delivered watches to every entitled backer.
In the pre–JOBS Act era, the SEC managed the risk of investing in startups by restricting the practice to well-heeled individuals. With Title III, individuals with an annual income or net worth of less than $100,000 would be limited to investments of $2,000 or 5% of their income or net worth every 12 months. (Those with more financial wherewithal would have higher limits.) No company could crowdfund more than $1 million annually. "People will only be able to invest small amounts of money, so nobody can get burned too much," says Douglas Ellenoff, a securities lawyer. "It’s very paternalistic."
Ask Indiegogo’s Rubin how he’d go about making investing in private companies safe for the uninitiated, and he brings up the earliest days of e-commerce in the mid-1990s, when the very idea of making purchases over the Internet was new and scary. Rather than try to eliminate risk, the government allowed the emerging field to work out its own kinks. Today, he argues, "government needs to give the industry a little bit of time to figure this out, and then if it doesn’t work they can then come in and regulate it more."
Although Indiegogo is eager to open equity to the masses, it’s not a given that the companies that find success on its platform will be as enthusiastic. In 2013, security startup Canary raised $2 million on Indiegogo for its first product, a pint-size gadget containing a camera and sensors for monitoring motion, temperature, and air quality. "We got 10,000 customers immediately, which gave us great product feedback and enabled us to demonstrate to investors what sort of interest there was from day one," says Adam Sager, the company’s cofounder and CEO. "That proved to be extremely helpful to us."
However, Canary would not have jumped at the chance to sell little bits of itself to random strangers. It prefers handpicked backers with relevant expertise, such as Michael Marks, the former CEO of manufacturing giant Flextronics. "Who you have around the table is as important as, if not more important than, the money you’re bringing in," says Sager.
When crowdsourced investing does become a reality, it could be less about getting in on the ground floor of the next billion-dollar acquisition than giving very small businesses a boost.
"There are some people who will be like, ‘I can either invest in Facebook or IBM, or I could invest in this local pizza shop—I’d rather invest in the local pizza shop because I’m trying to support the community,’ " says Rubin. Which means that this new form of funding could serve its purpose—even if that pizza place doesn’t go on to become the next Shake Shack.
A version of this article appeared in the October 2015 issue of Fast Company magazine.