Because of the Jumpstart Our Business Startups (JOBS) Act – which was passed in 2012 – it’s now possible for anyone to invest in early-stage startups. Although, there are certain restrictions, such as on the amounts of the offerings. But for the most part, equity crowdfunding has certainly democratized the process.
So, yes – you do have the opportunity to perhaps get a piece of the next Microsoft (NASDAQ:MSFT) or Facebook (NASDAQ:FB)!
The process for equity crowdfunding is fairly easy. You sign up for a site like Crowdfunder, AngelList, SeedInvest, MicroVentures and WeFunder and review of the profiles of various deals. Generally, when you decide on making an investment, you will receive either common stock or a security known as a SAFE (Simple Agreement for Future Equity), which allocates equity when there is a “trigger event” like an acquisition, funding or IPO. There may also be perks, such as meetings with the founders or even T-shirts.
Crowdfunding is still in the early stages and is small when compared to the venture capital industry. But the category is growing. Consider that several of the top platforms have posted strong increases in activity for the start of the year.
So, what are some of the trends for the industry? What might we see? Well, let’s take a look:
Reform
As with any pioneering legislation, there are certainly flaws with equity crowdfunding. But it does seem likely that there will be tweaking of the law.
Here’s how InvestorPlace’s Luke Lango sees it:
“The funding cap will get bumped up to levels more appropriate with the venture capital landscape — likely somewhere in the $5 million to $20 million range. Listing requirements will go down, and be tiered according to investment size, so upfront costs across the board will fall. Those costs will likely have the option of being deferred until capital is raised. Importantly, as a result of all those changes, higher quality startups and more investors will flock into the equity crowdfunding space, and the real crowdfunding revolution will happen.”
In fact, we have already seen some changes, such as with the impact of the novel coronavirus. The Securities and Exchange Commission has implemented new rules that speed up the process for companies.
For example, within 48 hours of hitting the minimum funding levels, the company can close the deal. There also does not have to be reviewed financials for capital raises up to $250,000.
Education
Equity crowdfunding still remains largely unknown or mysterious to many potential investors, which is certainly a limitation to the growth. But as the platforms get larger, they will be able to devote resources to marketing and education.
For example, StartEngine has partnered with Kevin O’Leary, who is a member of the popular “Shark Tank” TV program (which is on CNBC) and is also an asset manager. His role is as a strategic advisor will be to help evangelize equity crowdfunding.
Consolidation
There are many equity crowdfunding sites and quite a few are small. Yet scale is a key for creating any marketplace, as seen with platforms like eBay (NASDAQ:EBAY). Thus, in the years ahead, it seems likely there will be consolidation.
“The customer base is getting used to a few brand names they work with, and many of the smaller, more risky players are being flushed out,” said Jeff Holzmann, who is the CEO of IIRR Management Services (IRM). “This will pave the way for large companies to invest in this new industry, and we can already see giants like Goldman Sachs (NYSE:GS) and Everest Reinsurance taking equity positions in the crowdfunding space.”
Growth
It appears that the coronavirus has been a catalyst for equity crowdfunding since traditional financial sources, like banks, are being more hesitant. But this trend is not likely to be temporary.
“As businesses are discovering the value of crowdfunding, this trend is likely to sustain well beyond Covid-19,” said Neville Crawley, who is the CEO of Kiva. “It is a simple way to raise funds immediately, while other methods can take months to kick in.”
Tom Taulli (@ttaulli) is an advisor and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
