We keep pretty close tabs on what's happening on earth of crowdfunding, and as I read the many articles in major publications or see segments on TV news, I'm amazed at how little understanding there's about crowdfunding, and the vast differences involving the donation-based crowdfunding that's been around for numerous years, and the equity-based crowdfunding that's on the very near term horizon.
So i'd like to take a moment to attempt to explain. Donation-based crowdfunding is pretty simple. People effectively "donate" money to a small business or cause with no expectations of ownership. In return, they receive some sort of tangible "award" for their donation and the awards usually can be found in tiers based on how much one donates. A small donation might result in 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 countless others, have a percentage fees from funds raised - generally 5-10%.
Equity-based crowdfunding, however, is a completely different animal altogether, and frankly, a great deal more exciting. Equity crowdfunding gets the potential to fully turn the entire world of finance on its head, by providing everyday investors and small private companies direct access to each other - without the financial intermediaries, who for decades, have essentially cornered the market 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 organization in exchange for their investments - be it shares of stock in a corporation, or units of ownership in an LLC. So instead of a shirt from the next iteration of business giants like Google, LinkedIn, Facebook, or Twitter, investors can 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 small business plan, a financial model or audited/certified financial statements, a valuation of these equity offering, and numerous other things before they can list their offering on a SEC-approved website platform. The following wave of new businesses is probably be dramatically bolstered by this new access to capital. Instead of a small pool of investors putting capital into new companies, there will be billions of people worldwide who are able to fund tomorrow's startups.
As things stand today, you can find already to significant changes to securities laws in the U.S. around equity crowdfunding -first, companies are actually permitted to raise 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 next and final piece of the equity crowdfunding puzzle is likely to be when the SEC unveils the guidelines for allowing equity crowdfunding to non-accredited investors. This will function as the major pivot point where everyone is likely to be permitted to buy private companies. Providing the guidelines for companies to raise this kind of capital aren't too cumbersome, this is a BIG DEAL Wefunder
. Now what's much more fascinating is to attempt to predict and understand what could happen once this third and final piece 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's been a lot of infrastructure being built behind the scenes to organize for the events which can be now essentially upon us. Institutional investors aren't dumb - many have been pouring money into the portals and other businesses that'll support equity crowdfunding. Others have been focusing on creating secondary market for reselling crowdfunding investments which may give the equity crowdfunding market and investors much-needed liquidity - making those investments much more appealing. And, it's not merely the institutional investors who're making bold moves. Social media marketing companies, media/publishers, and others have been jockeying themselves into position as well by either buying equity crowdfunding infrastructure companies or developing capabilities in-house.
Whenever you think back once again to the rise of the private computer market in the 1980's and the emergence of the Internet in the mid 1990's, this sea change in the finance industry gets the potential to be just as, or even more, prolific. The entire world forever changed in 1995 when Netscape developed the initial browser and managed to get freely available. It resulted in how many web users growing from 16 million in the beginning of 1996 to 360 million by the finish of 2000. The share prices of the new firms that evolved, Yahoo, eBay, Amazon, Priceline, etc., who emerged to service the burgeoning population increased by around 100 times between 1996 and 2000. The exact same will probably eventually companies who will service the massive population of equity crowdfunding investors.