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Crowdfunding involves combining capital from many people to fund a new business. Crowdfunding capitalizes on people’s social networks on Crowdfunding digital platforms to connect entrepreneurs and investors and potentially increase entrepreneurship. Crowdfunding allows entrepreneurs to raise millions of dollars from any individual with the financial capacity to invest. It also provides a platform for any individual with an idea to pitch in front of capable investors. One of the most outstanding projects that amazed people involved an individual who planned to introduce a new potato salad recipe to the market. His target was to raise ten dollars, but he surpassed it and raised more than fifty-five thousand dollars. Investors have hundreds of projects to choose from and invest as little as ten dollars. These sites profit by getting a specific share of the funds raised.
There are four types of crowdfunding donation, debt, rewards, and equity. Donation-based crowdfunding involves people giving a person, company, or campaign money without expecting anything. For instance, a person may create a crowdfunding campaign to buy equipment for his company. People will give him money only to support his growth. Debt-based donations involve peer-to-peer lending. Here, backers pledge money which is considered a loan and must be refunded with interest within a specified timeframe. Rewards involve the crowdfunding method where the donor receives something in return. The size of rewards is proportional to donation size. This helps in incentivizing higher contributions. For instance, participants can receive T-shirts or subsidized services and products. Finally, equity-based crowdfunding allows start-ups and businesses to give away a portion of their business in exchange for funding. Here, donors receive shares of the company depending on their contribution.
Examples of crowdfunding websites include GoFundMe and Kickstarter. GoFundMe is the most prominent crowdfunding website. The platform has raised more than fifteen billion dollars through more than one hundred million donors since 2010. It is mainly popular with people seeking financial assistance to recover from disasters or medical expenses. Kickstarter is most famous for start-up companies. Kickstarter has facilitated the funding of more than 200,000 projects with more than six billion dollar pledges. It appeals to aspiring businesses seeking capital and hoping to access a large audience. This platform differs from GoFundMe in that it only allows the creation of projects that can be shared with others. Also, it is not meant for charity donations or projects without incentives.
The Jumpstart Our Business Start-ups (JOBS) Act was introduced on April 5, 2012, and brought about the US equity crowdfunding industry. Initially, only accredited investors could invest. In June 2015, the JOBS Act was partly effected through Title IV (Regulation A+). Title IV enabled big companies to crowdsource capital from ordinary individuals who were not accredited, investors. After about one year, another component of the JOBS Act, Title III (Regulation Crowdfunding), was effected. This expanded the scope of the United States equity crowdfunding platform because it allowed early-stage start-ups to receive donations of up to one million dollars within one year from either ordinary people or accredited investors. Title III (Regulation Crowdfunding) helped create about three hundred million potential new investors for the United States’ existing and new small businesses.
Through regulated crowdfunding, eligible businesses can market and sell securities. In the US, every regulated crowdfunding transaction must occur online through a Securities and Exchange Commission registered intermediary, either a funding or a broker-dealer portal. Potential investors must open accounts with crowdfunding intermediaries (funding or broker-dealer portal). Every written communication concerning crowdfunding investment must be delivered electronically. The US Securities and Exchange Commission (SEC) plays a significant role in regulating which issuers and investors can engage in crowdfunding and how business on portals should be conducted according to reporting requirements. Also, there is a maximum aggregate amount a company can raise in one year. The US Securities and Exchange Commission limits the amount of funds a single investor can invest across all crowdfunding offerings within one year.
Also, an investor cannot resell Securities bought in a crowdfunding transaction until twelve months elapse. Also, there are “bad actor” disqualification provisions that apply to regulated crowdfunding offerings. These provisions lock out issuers who have, for instance, been sanctioned by courts or governments for security fraud or other illegal activities. Generally, any company that wishes to use crowdfunding to offer and sell securities must abide by the government securities laws. According to these laws, any security sale or offer must be either registered by the US Securities and Exchange Commission or meet the exemption conditions. Regulated crowdfunding exists because there is a progressive government, social media, the Internet, and technology. When the United States government, the Securities and Exchange Commission, and Jumpstart Our Business Start-ups (JOBS) Act supporters pushed for the introduction of regulated crowdfunding, they allowed potential start-ups and investors to access regulated crowdfunding, which is an exponentially growing global platform.
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