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 is about crowdfunding, and the vast differences between the donation-based crowdfunding that's been with us for numerous years, and the equity-based crowdfunding that's on the near term horizon.
So allow me to set aside a second to attempt to explain. Donation-based crowdfunding is pretty simple. People effectively "donate" money to a small business or cause without 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 what much one donates. A small donation might result within 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 a huge selection of others, have a percentage fees from funds raised - generally 5-10%.
Equity-based crowdfunding, however, is an entirely different animal altogether, and frankly, a great deal more exciting. Equity crowdfunding gets the potential to totally 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 many years, have essentially cornered the market on private investments, and have lined their pockets in the process.
The main difference in equity vs. donation crowdfunding is that investors get direct ownership in the organization in trade for their investments - be it shares of stock in a corporation, or units of ownership within an LLC. So rather than a shirt from the following iteration of business giants like Google, LinkedIn, Facebook, or Twitter, investors will 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 should create a small business plan, an economic 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. Another wave of new businesses is likely to be dramatically bolstered by this new access to capital. Rather than a tiny pool of investors putting capital into new companies, there will soon be billions of people worldwide who can fund tomorrow's startups.
As things stand today, there are 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 referred to as "general solicitation" ;.This hasn't been allowed considering that the 1920's in the U.S.
The next and final bit of the equity crowdfunding puzzle is likely to be when the SEC unveils the rules for allowing equity crowdfunding to non-accredited investors. This will probably function as the major pivot point where everyone is likely to be permitted to buy private companies Wefunder. Providing the rules for companies to raise this type of capital are not too cumbersome, this is a BIG DEAL. Now what's much more fascinating is to attempt to predict and know what could happen once this third and final bit of the equity crowdfunding puzzle is put set up, and by all accounts, this will probably happen some amount of time in the second quarter of 2014.
First, there's been plenty of infrastructure being built behind the scenes to get ready for the events which can be now essentially upon us. Institutional investors are not dumb - many have now been pouring money to the portals and other businesses which will support equity crowdfunding. Others have now been working on creating secondary market for reselling crowdfunding investments which will supply the equity crowdfunding market and investors much-needed liquidity - making those investments much more appealing. And, it's not merely the institutional investors that are making bold moves. Social networking companies, media/publishers, and others have now been jockeying themselves into position as well by either buying equity crowdfunding infrastructure companies or developing capabilities in-house.
Once you think back once again to the rise of the non-public 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 like, or even more, prolific. The planet forever changed in 1995 when Netscape developed the very first internet browser and managed to get freely available. It triggered the amount of web users growing from 16 million at the start of 1996 to 360 million by the end of 2000. The share prices of the newest 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 probably will occur to companies who'll service the massive population of equity crowdfunding investors.