On sites like Indiegogo
, anybody could help “fund” any idea, product, or company. However, the user could not receive equity in return for their cash commitment: rather they’d get a first-iteration of the product, or just a token of appreciation from the company, like a t-shirt or social media shoutout.
This model actually still plays an important role in early stages for hardware companies that need an initial investment from users. The famous example (and “caveat emptor”) would be with the Oculus VR, one of the first virtual reality companies to ship a ready-to-use headset to consumers. Oculus VR successfully raised $10 million through Kickstarter in 2012
, shipping out prototypes to a number of the early backers. However, none of these “donors” (as they are known on the sites) were party to the $2 billion buyout offer from Facebook in March 2014
. A lot of the crowdfunding community felt burned in the process, feeling like their initial financial support should have been compensated in the offer.
2. The Accredited Investor World
The majority of crowdfunding sites, like EquityZen
, can only offer investments to accredited investors, which require investors to meet relatively high income or net-worth thresholds. These requirements are defined by the SEC
. The benefit to investors, though, is that they can actually participate in the upside of being an equity owner in private businesses (or, in the case of RealtyShares, a private commercial property).
What this means for equity crowdfunding
Don't expect a whole lot of movement yet. The administrative costs of non-accredited crowdfunding, and fundraising size limitations, will likely stall any widespread adoption. Particular hurdles will be:
- Startups can only raise $1 million in a 12-month period
- For any raise greater than $500,000, fully-audited financial statements must be produced (unless it's a first-time raise, in which a statement review by an accountant is sufficient)
Administrative costs for Title III capital raises have been pegged at $30,000+, which is a lot to swallow for a company raising less than $1 million. However, as the administrative costs get standardized (and then commoditized), expect to see more traction with Title III.