Investing The Crowdfunding Way

Earlier today, the SEC unanimously voted to propose rules for investing via crowdfunding platforms and portals such as CircleUp. As part of last year’s JOBS Act, accessible equity financing has been highly anticipated by early stage ventures. The ruling will generate a proposal to allow for these non-public ventures to raise capital through online crowdfunding platforms in exchange for equity, but more importantly it will allow non-accredited investors to engage in the risk and rewards of startup investment.

Non-accredited investors with incomes under $100,000 will be permitted to invest the greater of $2,000 or 5% of their income or net worth every 12 months, and those with income above $100,000 may invest up to 10%. And companies choosing to utilize this new resource will be permitted to raise up to $1 million in crowdfunding capital during each 12 month cycle. Restrictions regarding ownership, valuation and SEC reporting (depending on the $ amount raised) will also help facilitate the safe introduction of crowdfunding as an alternative to Angel Investment, IPOs and Venture Capital. (See the SEC’s proposed rules here). This new means of obtaining capital isn’t appropriate for everyone, but for the venture with capital needs under $1 million, this presents the first opportunity to utilize the public market without the need to be IPO ready.

These rules will be the beginning of a new age of startup funding, and investor access. Early stage investment will no longer be restricted to those with significant assets or annual income, allowing for the average Joe to engage in the thriving startup culture across the United States and the potential reward associated with getting in on the ground floor. This new access will certainly open doors, but the SEC is also being careful to protect those in the $100,000 and under income bracket from misunderstanding the risk of early stage investment, and investing beyond their means via restrictions on financing and disclosure requirements for participating companies.

For the first time, investors and new ventures will be able to connect and support one another without the need for costly IPOs, or traditional Angel investment and Venture Capital. But don’t assume those investing will all fall into the lower income brackets. The existence of crowdfunding portals will simply increase exposure to a variety of startups that due to geographic or industry restrictions may have not previously found themselves in front of investor pools. And accredited investors could benefit from the ability to invest in broader varieties of startups in locations and industries they may have previously been unaware of.

Once these proposed regulations are put into practice expect crowdfunding portals to see huge volume increases (the SEC estimates somewhere between 50-100 portals/brokers will enter this space), but be aware of the disclosure requirements for each company and the risk associated with the high rate of failure in the startup community.

Welcome to investing, the crowdfunding way!