Today—unless you have a net worth of at least one million dollars, or an income of at least $200,000 per year—it is not legal for you to receive equity in exchange for backing a company on a crowdfunding site. But as of next May 16, Title III of the JOBS Act goes into effect, bringing equity crowdfunding to the 99%.
Welcome. Here's what you should know:
What is Title III of the JOBS ACT?
The "Jumpstart Our Business Startups Act" (the JOBS act), which aims to make it easier for new companies to raise money, passed Congress in 2012. Title III is the part that makes rules for non-accredited crowdfunding.
What is different now?
Projects, and some companies, already raise money from anyone on crowdfunding platforms like Kickstarter and Indiegogo, but aside from a reward here and there (nice T-shirt, bro), "investors" on these platforms don’t get or expect anything in return. A bunch of other websites like CircleUp, Crowdfunder, and WeFunder, which call themselves "equity crowdfunding platforms" allow investors to fund companies in exchange for real securities. These platforms could previously only work with "accredited investors" (those rich people we mentioned earlier). Under the new rules, they can technically open fundraising to anyone.
Investors who make less than $100,000 a year can now invest up to either 5% of their annual income, or $2,000, whichever is greater. Investors who make more than $100,000 a year can invest up to 10% of their annual income, but they cannot invest more than $100,000 in one year.
So does that mean I get equity for my Kickstarter investments now?
No. Kickstarter has said that it’s mostly interested in helping creative projects like books and plays come to fruition. Equity crowdfunding doesn’t quite jive. "The investment model is powerful and there's a need for it, but it's also limiting," a Kickstarter spokesperson said in a statement to Fast Company. "Not all creative ideas are meant to be investment vehicles."
Indiegogo's founder, on the other hand, has said he wants to facilitate equity crowdfunding. The company confirms it's looking at options for equity crowdfunding, but it would need to change its policies dramatically in order to do so under the new rules.
Does this mean I can invest in the next Facebook?
Also unlikely. Some aspects of the new rules may discourage companies that plan on fast growth from raising money through this type of crowdfunding.
When working with accredited investors, some equity crowdfunding platforms create Special Purpose Funds, which group all of the crowdsourced investors into one fund that invests as a single shareholder in the company. The SEC decided not to allow this for unaccredited investors, and some say that means companies that have raised funding this way will have a "messy cap table"—essentially, too many shareholders—that could make it more difficult to raise money from venture capitalists later. (Others say venture capitalists are making this argument only because they'd like to continue enjoying a monopoly on early-stage startup funding.)
There are other stipulations that may encourage companies that can raise capital elsewhere to do so: Companies that want to raise more than $500,000 using the new rules need to provide audited financials, which can cost tens of thousands of dollars. They're only allowed to raise up to $1 million this way each year. And after they've raised the money, they need to provide public documents to the SEC, much like a public company. "What would that mean to a private company?" asks Rory Eakin, a founder of consumer-products focused equity crowdfunding platform CircleUp. "What would that mean for your suppliers, employees, and potential employers to know that on an ongoing basis? It’s never been done before."
CircleUp decided not to open its platform to non-accredited investors. "We are very strong supporters of a more transparent private market," says Eakin. "But in making these rules, in the spirit of investor protections, the regulators have put more barriers for companies to raise this way than they will (encounter) anywhere else." Alejandro Cremades, the cofounder of startup crowdfunding company OneVest, shared these views. "There may be a type of company that will be suitable to raise capital under Title III," he wrote in an online summary that explained why his company would not be working with non-accredited investors. "But our sentiment is that sophisticated tech founders will avoid this funding option like a plague. It comes with too many strings attached and alternative funding options are less expensive, less risky, and more sound financially and time-management wise in the long term."
Another equity crowdfunding site, WeFunder, does plan to open to non-accredited investors beginning May 16. "I think we’re going to help a lot of companies that wouldn’t have been able to get off the ground get started," its founder said in an interview earlier this month.
So what's next?