Is Crowdfunding the New Investing?

by Carla Lake | September 17, 2013 2:39 pm

youngInvestorsB.png[1]Folks from the millennial generation — or “the young and the riskless,”[2] as The Wall Street Journal once referred to us — are not the type to be lured in by high-risk, high-return investing styles like options, forex or short-term trading. We’re much more likely to invest in the “once-bitten, twice-shy” style of our parents[3] who were burned by the 2008 crisis, despite conventional wisdom that youth is the best time to take risks.

But giving a couple dollars[4] to fund someone’s dream? That doesn’t seem so risky, and it appeals to our altruistic generation.[5]

Crowdfunding is a way for artists, writers, indie game developers, and other creative types to get the money to make their visions come alive — and it’s incredibly popular among millennials[6]. Crowdfunded projects range in scale from chicken paintings[7] to full-length movies[8]. Most projects let you contribute anywhere from a few bucks to thousands of dollars, with rewards for different levels of giving.

This type of funding could be compared to alternative investments like buying fine wine or art in the hopes they will appreciate in value. But to be honest, most people are simply funding these projects because they think they’re cool and they believe in the mission.

However, crowdfunding has taken a new turn this summer with an addition to the JOBS Act[9]. It’s no longer strictly the realm of artistic projects — certain crowdfunding sites allow ordinary people to fund someone else’s business vision without needing to be a mega-rich venture capitalist like you see on Shark Tank[10].

In simple terms, the change to the JOBS Act allows for-profit companies to use crowdfunding sites to raise money from Accredited Investors[11] (people and organizations with a LOT of money) in exchange for equity or debt. Before this amendment to the law, using crowdfunding rather than more formal channels would have violated SEC regulations. This change is a first step[12] toward being able to raise funds from non-accredited investors (ordinary people), which could be an important new source of capital for small businesses to create jobs.

Already, some crowdfunding sites — Crowdfunder[13] and FundRazr[14] being two of them — cater to for-profit small businesses, though most crowdfunding still focuses on personal or artistic campaigns[15]. Depending on the kind of business, backers receive products or securities[16] in exchange for their support.

So will crowdfunding become a new way to invest in startup businesses you believe in without having to part with too much money? Or will it remain strictly an artists’ refuge?

Only time will tell, but if your average 23-year-old with a spare $10 could become a venture capitalist using these tools, it could be a gamechanger for capital markets.

Carla Lake is an assistant managing editor at InvestorPlace. She has never participated in crowdfunding, though she’s got her eye on Frameri[17] (pun intended).

  1. [Image]:
  2. the young and the riskless,”:
  3. “once-bitten, twice-shy” style of our parents:
  4. giving a couple dollars:
  5. our altruistic generation.:
  6. incredibly popular among millennials:
  7. chicken paintings:
  8. full-length movies:
  9. with an addition to the JOBS Act:
  10. Shark Tank:
  11. Accredited Investors:
  12. a first step:
  13. Crowdfunder:
  14. FundRazr:
  15. most crowdfunding still focuses on personal or artistic campaigns:
  16. products or securities:
  17. Frameri:

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