Equity crowdfunding emerged in recent years and has helped disrupt traditional fundraising avenues for startups such as venture capital and angel investing. This form of fundraising is a model that helps democratize access to capital and can empower everyday investors to invest in innovative companies. Tying it all together are crowdfunding platforms – online platforms that help facilitate the fundraise on behalf of the startups seeking capital. In this blog, we’ll explore the role of crowdfunding platforms, the difference between broker-dealer platforms vs funding portals, and the unique benefits they may be able to provide to startups.

History of Equity Crowdfunding

The concept of crowdfunding is not new; it has roots back to authors and musicians participating in community-based publishing by seeking out wealthy benefactors to sponsor their works.[1] However, the modern incarnation of crowdfunding began to take shape in the early 2000s, primarily through donation-based and reward-based models. Platforms like Kickstarter and Indiegogo allowed creators to pitch their projects and receive financial support in exchange for perks rather than equity.

The JOBS Act

The opportunities changed in 2012 with the passage of the Jumpstart Our Business Startups (JOBS) Act in the United States. This landmark legislation aimed to stimulate the economy by facilitating access to capital for small businesses. Among its provisions was the inclusion of equity crowdfunding, allowing startups to raise funds by offering opportunities to a broader range of investors, including non-accredited individuals. The SEC implemented regulations for equity crowdfunding, leading to the emergence of funding portals and broker-dealer platforms.[2]

Since the JOBS Act, equity crowdfunding has experienced exponential growth. According to various industry reports, billions of dollars have been raised through crowdfunding platforms, enabling thousands of startups to bring their innovative ideas to life.[3] The market can offer opportunities for diversification, with platforms catering to various sectors, including technology, healthcare, real estate, and consumer products[4].

Broker-Dealer Platforms vs. Funding Portals

As the equity crowdfunding landscape has matured, two primary types of platforms have emerged: broker-dealer platforms and funding portals. Both serve as intermediaries connecting startups with potential investors, but they may operate under different regulatory frameworks and offer distinct services.

Broker-Dealer Platforms

Broker-dealer platforms are typically registered with the SEC and are subject to more stringent regulatory requirements than funding portals. They can facilitate both equity and debt financing and often provide additional services such as investment advice, due diligence, and compliance support. Broker-dealers can also assist in secondary market transactions, allowing investors to buy and sell their equity stakes after the initial fundraising round.[5]

Funding Portals

Funding portals, on the other hand, are designed specifically for equity crowdfunding and are also registered with the SEC but have different regulatory requirements than broker-dealers. They focus primarily on connecting startups with investors without engaging in secondary trading of securities. Funding portals can offer a more streamlined experience for both startups and investors, often featuring user-friendly interfaces and lower fees.[6]

Similarities and Differences

Both broker-dealer platforms and funding portals serve as ways to raise funds in the equity crowdfunding ecosystem. They help facilitate access to capital for startups and provide investment opportunities for individuals. However, the main differences lie in their regulatory obligations and the range of services they can offer. Broker-dealer platforms tend to be more comprehensive, have stricter requirements, conduct more thorough due diligence, and can offer additional services and support. Funding portals still conduct due diligence, but primarily focus on the crowdfunding experience itself.

Benefits of Crowdfunding Platforms for Startups

The rise of equity crowdfunding platforms has introduced advantages for startups seeking funding. Below are some of the benefits:

1. Access to a Broader Investor Base

One advantage of equity crowdfunding is the ability to tap into a diverse pool of investors. Startups can attract not only accredited investors but also non-accredited individuals who may be eager to support innovative companies. This democratization of investment can open the door for more people to participate in the startup ecosystem, leading to a wider range of funding options.

2. Increased Visibility and Marketing

Running a crowdfunding campaign can serve as an effective marketing tool for startups. By promoting their projects on crowdfunding platforms, entrepreneurs can gain visibility and attract attention from potential customers and investors alike. A successful campaign can create buzz around a product or service, helping to build a loyal customer base even before the official launch.

Additionally, equity crowdfunding allows general solicitation, or the marketing of the securities on publicly accessible channels like social media posts and paid advertisements and email campaigns. This public marketing of the crowdfunding raises helps increase the visibility of the campaign to potential investors who might not know about the opportunity otherwise.

3. Validation of Business Ideas

Crowdfunding can allow startups to test their business ideas in the market before fully committing to them. A successful fundraising campaign may be seen as a strong indicator of market demand. By gauging investor interest and feedback, entrepreneurs can refine their offerings to the market best suited for their product or service.

4. Lower Barriers to Entry

Traditional fundraising avenues can be daunting for startups, often requiring extensive networks, connections, and significant amounts of capital. Equity crowdfunding helps lower these barriers, enabling entrepreneurs to raise funds without having to navigate the complexities of venture capital or angel investing. This accessibility can help foster innovation and encourages more people to pursue their entrepreneurial dreams.

5. Community Building

Crowdfunding platforms can help create a sense of community around the startups they support. Investors may not just be financial backers; they can also become advocates and ambassadors for the companies they invest in. This sense of belonging may lead to feedback, support, and even partnerships that could help startups grow and thrive.

6. Flexibility in Funding Amounts

Equity crowdfunding platforms offer startups the flexibility to set their funding goals based on their specific needs. Under SEC regulations, startups are able to raise up to $5 million in a 12-month period[7], but are not required to set their investment target this high. Whether seeking a modest amount to launch a product or a more significant sum for expansion, entrepreneurs can tailor their campaigns to help meet their objectives. This adaptability may be beneficial for early-stage startups that may not require large sums of money.

Final Thoughts

Equity crowdfunding platforms have helped transform the startup fundraising landscape, providing entrepreneurs with unprecedented access to capital and support. There are many benefits of utilizing equity crowdfunding, ranging from broader access to investors and increased visibility to community building and validation of business ideas. Crowdfunding platforms are helping play an important role by facilitating these transactions. Whether a funding portal or a broker-dealer, like MicroVentures, these platforms are helping startups gain access to the capital they need to scale.

Want to learn more crowdfunding? Check out the following MicroVentures blogs to learn more:

• Tangible or Intangible: Choosing Crowdfunding Perks
• Keeping a Clean Cap Table: Understanding Crowd Notes
• Equity vs Revenue Share: Choosing the Right Path
• Reaching New Audiences: Effective General Solicitation
• Less is More: Compelling Pitch Deck Design

Is your startup ready to raise capital?  Apply today to raise funding with MicroVentures!

 

[1] https://journalpublishingculture.weebly.com/uploads/1/6/8/4/16842954/ohara.pdf

[2] https://www.cato.org/policy-analysis/walk-through-jobs-act-2012-deregulation-wake-financial-crisis

[3] https://www.fundera.com/resources/crowdfunding-statistics

[4] https://www.forbes.com/councils/forbesagencycouncil/2021/12/20/the-meteoric-rise-of-equity-crowdfunding/

[5] https://www.sec.gov/files/oasb-broker-dealer-building-block.pdf

[6] https://crowdwise.org/funding-portals/crowdfunding-intermediaries-funding-portals-vs-broker-dealers/

[7] https://www.sec.gov/resources-small-businesses/exempt-offerings/regulation-crowdfunding

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.