{"id":5577,"date":"2016-04-11T00:38:58","date_gmt":"2016-04-11T05:38:58","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/starting-a-business\/what-is-equity-crowdfunding.html"},"modified":"2024-05-22T01:53:01","modified_gmt":"2024-05-22T06:53:01","slug":"what-is-equity-crowdfunding","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/starting-a-business\/what-is-equity-crowdfunding.html","title":{"rendered":"What Is Equity Crowdfunding?"},"content":{"rendered":"\n
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What Is Equity Crowdfunding?<\/h1>\n
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Raising the capital necessary to successfully launch a small business is perhaps the most difficult hurdle for most entrepreneurs. Common options include maxing out multiple credit cards or taking out bank loans, both of which present personal financial risks. Venture capitalists and angel investors, meanwhile, are focused on multimillion-dollar investments in companies poised for rapid growth.<\/p>\r\n

With the advent of equity crowdfunding<\/a>, however, even individuals with just a few hundred dollars to invest can get in on the game and take an ownership stake (however small) in the company. Below is an overview of this emerging area of business financing<\/a>, which is well-suited to smaller businesses typically passed over by larger investors.<\/p>\r\n

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The Basics of Equity Crowdfunding<\/h2>\r\n

At its essence, "crowdfunding" is a form of fundraising in which a startup (or even just an individual) raises small amounts of capital from a large pool of investors, typically through an online intermediary. Many of these intermediaries, such as Kickstarter and GoFundMe, are limited by the inability of companies to offer equity in exchange for contributions. Instead, they typically offer unique rewards that correspond with the funding level. For instance, someone making a modest contribution toward the publication of a book may receive a signed copy of the book once it’s in print.<\/p>\r\n

Equity crowdfunding, on the other hand, involves an exchange of capital for equity. As with traditional equity investors, those investing through an equity crowdfunding intermediary risk losing their money entirely but also may see exponential returns. What’s different is the platform, which allows direct interaction between the company and the investors, and the size of the investments. Equity crowdfunding intermediaries include AngelList, Early Shares, and Crowdfunder.<\/p>\r\n

Equity Crowdfunding and the JOBS Act<\/h2>\r\n

On Sept. 23, 2013, the Securities and Exchange Commission (SEC) enacted rules under the Jumpstart Our Business Startups (JOBS) Act<\/a> that paved the way for companies to sell securities (equity) through crowdfunding. Companies may raise up to $1 million — in aggregate — through crowdfunding in any 12-month period. As of this writing, the SEC limits equity crowdfunding to accredited investors only. To be considered an accredited investor, individuals must meet one of the following criteria:<\/p>\r\n