Crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. ((Tanya Prive, What is Crowdfunding and How does it Benefit the Economy, Forbes (Nov. 27, 2012, 10:50 AM), http://www.forbes.com/sites/tanyaprive/2012/11/27/what-is-crowdfunding-and-how-does-it-benefit-the-economy/.)) When many people hear the word “crowdfunding,” they think of reward-based crowdfunding, like Kickstarter or Indiegogo, and people across the globe pledging money to fund cool projects like the Pebble watch, video games, and The Veronica Mars Movie. Depending on the project and the amount of money pledged, a person may get nothing, a sticker, the product itself, or any other gift in return for their pledge. What most people don’t think of is equity crowdfunding. In contrast to grant crowdfunding, equity crowdfunding is a model that allows individual investors to share in the eventual profits of the business. ((See Tanya Prive, Three Myths About Equity Crowdfunding Debunked, Forbes (Oct. 27, 2014, 11:18 AM), http://www.forbes.com/sites/tanyaprive/2014/10/27/three-myths-about-equity-crowdfunding-debunked/.)) It is similar to grant crowdfunding in that it still relies on the “crowd,” or a large number of investors, to fundraise, but dissimilar in the way that investors are acquiring an investment, and not just pledging money. ((Id.))
Equity Crowdfunding and the JOBS Act
Title III of the JOBS Act deals with non-accredited crowdfunding, “which allows non-accredited individuals to participate and invest online into private companies, in small increments (say $1,000 to $5,000).” ((Chance Barnett, JOBS Act Title III: Investment Being Democratized, Moving Online, Forbes (Oct. 23, 2013, 9:29 PM), http://www.forbes.com/sites/chancebarnett/2013/10/23/sec-jobs-act-title-iii-investment-being-democratized-moving-online/.)) Title III is an important addition to the JOBS Act because it opens the door for an entire group of previously untapped investors to provide another outlet for raising capital. As of right now, only accredited investors can invest through equity crowdfunding platforms. ((Chance Barnett, The Crowdfunder’s Guide to General Solicitation and Title II of the JOBS Act, Forbes (Sept. 23, 2013, 10:40 AM), http://www.forbes.com/sites/chancebarnett/2013/09/23/the-crowdfunders-guide-to-general-solicitation-title-ii-of-the-jobs-act/2/.)) To be considered an accredited investor by the SEC, a person must 1) earn an income of more than $200,000/year for the past two years, or 2) have a net worth exceeding $1 million. ((Id.)) This restriction represents a serious limitation on the promotion of entrepreneurship and economic growth.
Equity Crowdfunding Today
On October 23, 2013, the SEC issued its proposal for the rules intended to govern Title III of the JOBS Act. ((Barnett, supra note 4.)) Over a year later, the crowdfunding community is still waiting. Although non-accredited investors still may not invest in equity crowdfunding platforms until the official promulgation of adopted and finalized SEC rules, that has not stopped investors from investing through equity crowdfunding. ((Id.)) In the first year preceding passage of the JOBS Act, 534 companies raised $217.7 million in equity capital. ((Kay Koplovitz, Equity Crowdfunding at Year One, What’s the Impact?, Forbes (Sept. 26, 2014, 11:23 AM), http://www.forbes.com/sites/kaykoplovitz/2014/09/26/equity-crowdfunding-at-year-one-whats-the-impact/. )) Crowdfunding platforms are continuously growing as companies begin to use the Internet as a means of both marketing and funding a project. It is predicted that the market will continue to grow as more specialized websites for equity crowdfunding come to the market. ((Id.))
The Importance of Title III
Equity funding is important for a number of reasons. In terms of numbers, Title III is predicted to flood the market with funding. It has been said that “the non-accredited investor market has the long term potential to actually dwarf the existing VC market . . . which some estimate will grow to a $300 billion market.” ((Barnett supra note 4.)) Title III also has the potential to level the playing field when it comes to start up investment. Typically, investing in start-ups was restricted to the extravagantly wealthy. But with equity crowdfunding, an average person can make a small contribution to a start-up. ((Id.)) Equity crowdfunding, although growing, needs the infusion of funds from non-accredited investors to truly take off. Although there are 8,000,000 accredited investors in the United States, very few of them have ever invested in a start-up. With the addition of non-accredited investors in the equity crowdfunding market, “there is a chance Title III may cause a funding tsunami to hit the market.” ((Koplovitz, supra note 9.))