Equity Crowdfunding has gained significant traction subsequent to the passage of the JOBS Act and it is the process by which companies who seek to raise money do so via online offering of private company shares in consideration for an equity stake in the business enterprise. Unlike traditional crowdfunding, equity crowdfunding involves investment into a commercial enterprise, and is therefore subject to securities and financial regulation. Equity crowdfunding is also referred to as investment crowdfunding, crowd investing or crowd equity.
As nicely explained in a May 2012 Washington Post article “Equity crowdfunding enables broad groups of investors to fund startup companies and small businesses in return for equity. Investors give money to a business and receive ownership of a small piece of that business. If the business succeeds, then its value goes up, as well as the value of a share in that business—the converse is also true. Coverage of equity crowdfunding indicates that its potential is greatest with startup businesses that are seeking smaller investments to achieve establishment, while follow-on funding (required for rapid growth) may come from other sources.
As further described by Forbes.com contributor Chancey Barnett in his July 2015 submission, “It was September of 2012 when the SEC finalized Title II of the JOBS Act, bringing with it new equity crowdfunding laws that allow startups (private companies) to publicly advertise their fundraising activities, while limiting investment to accredited investors only.
This brought startup investing squarely into the Digital Age as fundraising online for startups has burgeoned on top equity crowdfunding sites. What’s more…trends show that as an overall funding source by 2016 crowdfunding will be bigger than VC.
But while equity crowdfunding has enabled startups to publicly fundraise online, some startup companies have not chosen to take this new public fundraising route available to them under Title II equity crowdfunding.
Instead, a majority of startups have opted to do their equity crowdfunding in a more private way – electing to limit their fundraising to the private accredited investor communities pre-registered and qualified inside equity crowdfunding platforms.
The technical specifics of Public vs. Private fundraising mean that startups use the Reg D 506(b) exemption for private fundraising and the 506(c) exemption for public fundraising, also known as general solicitation. (SEC info)
For the full article from Forbes.com, click here