Equity Crowdfunding: How the Middle Class Can Create Wealth
Economist Louis Kelso, creator of the ESOP, once stated, “The problem with capitalism is there are not enough capitalists”. This means that until recently, most people did not have direct access to equity, only the very rich were able to access equity from businesses. This changed on April 5th, 2012, when the JOBS (Jumpstart Our Business Startups) Act of 2012. This bill allows for people to participate in “Crowd-Investing” or equity crowdfunding. This is very similar to rewards based crowdfunding except that instead of early access to a video game, or free product, investors get equity from the companies they choose. Equity crowdfunding platforms generated $2.1 billion in funding for start-ups in 2015. Moreover, the World Bank predicts that crowd-investing will be a $96 billion market by 2025 in developing countries alone.
The JOBS Act of 2012
The JOBS Act
According to the SEC, securities sold by crowdfunding sites must be held for at least a year unless they are sold to an accredited investor, a family member, or the securities are a part of an offering registered with the SEC. An accredited investor is an individual who makes at least $200,000 per year, $300,000 with a spouse or has a net worth of $1,000,000 (excluding primary residence) with or without a spouse. Any investor that does not fulfill either of these qualifications would be an unaccredited investor.
If the annual income or net worth is less than $107,000 during a 12-month period, then you can invest either $2200 or 5% of your income or net worth, whichever is lower. If both annual income and net worth are over $107,000, you can invest up to 10% of your income or net worth, whichever is lower. The maximum amount to invest is $107,000.
*** Title III of the JOBS Act has taken full effect in May 2016***
Maximum Investment in span of 12 months
Income/Net Worth less than $107k
$2200 or 5% of income/net worth, whichever is lower
Income/Net Worth greater than $107k
10% of Net worth/Income, whichever is lower
Regulations Pertaining to Crowdfunding Companies
Crowdfunding companies are permitted to allow start-ups to raise up to $1,070,000 over a year. Issuers also must provide the following information to investors:
- Information about officers, directors and individuals who own at least 20% of the company
- Description of the business and what the funds will be used for
- Financial statements and financial health
- If issuer will accept invests in excess of the goal
- Deadline to achieve target funding amount
- How securities are priced and the price of the securities
- Certain transactions with party
Equity Crowdfunding Platforms
TruCrowd is a small equity crowdfunding platform located in downtown Chicago and they connect start-ups and small businesses with both non-accredited investor and accredited investors to raise capital in exchange for equity. Setting up an account is free and investors are not charged fees for investing. Companies are charged $3500 plus an 8% success fee. Once the funding goal is reached, an agent will prepare and share certificates and any other documents related to the equity transfer. Once the documents are ready, the shares will transfer to investors and the entrepreneur will get the much-needed funds.
TruCrowd also has a subsidiary called Fundanna which focuses exclusively on cannabis- related businesses. Much like TruCrowd, it is free for investors. Companies are charged a $3,500 non-refundable fee to be credited against the final 8% success fee.
MicroVentures was founded in 2009 and much like TruCrowd, they also connect small business and start-ups with investors and they are based in both San Francisco and Austin, Texas. MicroVentures is partnered with Indiegogo via First Democracy, which is a registered funding page.
The minimum investment is $100. MicroVentures gets a 5% fee from the investor and a 5% fee from the investor a 10% carry for each successful raise. If a raise is unsuccessful, then investors will get their money back.
SeedInvest was founded by Ryan Feit and James Han in 2012 and they are headquartered in New York City. They also aim to connect investors with start-ups and small businesses. They charge a 2% transaction fee (up to $300), which will be refunded if the company does not reach their goal. Companies are charged a 7.5% cash fee plus a 5% convertible note or equity fee based on the capital raised by SeedInvest. Fees are taken at closing and are success-based.
SeedInvest has on auto-invest feature, which automatically opts you into deals you are legally able to invest in. You can opt-out of these investments through the auto-investment homepage.
All in all, the JOBS Act of 2012 was created to jumpstart the economy by allowing people from the middle and lower classes to provide funding to start-ups and small businesses, which provides the vast majority of new job creation in the United States.
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"Anyone Can Invest Most Companies Can Raise Funds." TruCrowd - Equity Crowdfunding. TruCrowd, n.d. Web.
"Be Part of the Future Growth in the Hemp Industry." Fundanna - Equity Crowdfunding. Fundanna, n.d. Web.
Gaskell, Adi. "The Rise Of Investment Crowdfunding." Forbes. Forbes Magazine, 21 Mar. 2016. Web.
"Investor Bulletin: Accredited Investors." Investor.gov. SEC, 23 Sept. 2013. Web.
MicroVentures Blog. MicroVentures, 2017. Web.
"Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers." SEC Emblem. SEC, 14 July 2017. Web."SeedInvest." SeedInvest. SeedInvest, 2017. Web.
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© 2017 Marcus T Caine