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Equity Crowdfunding

How Equity Crowdfunding Works

Crowdfunding is the process by which a large number of individuals make small monetary contributions into a single pool, ultimately funding a new venture or project. Early forms of crowdfunding can be traced back to the 17th century with popular application during the cooperative movement in the 19th and 20th centuries.

Today, the Internet serves as the primary infrastructure for crowdfunding. While the basic mechanics are unchanged, crowdfunding campaigns are structured differently based on the venture or product seeking capital. The four most common crowdfunding structures include reward-based, philanthropic, debt, and equity.

  • Reward-based Crowdfunding: Individuals back tangible consumer products, various forms of art work, and other ideas in exchange for early access to products, discounts on purchases, or other incentives. Kickstarter is an example of a rewards-based crowdfunding platform.
  • Philanthropic Crowdfunding: Individuals back a charity or non-for-profit fundraiser, providing funds to further a cause or movement. Crowdrise is an example of a philanthropic crowdfunding platform.
  • Loan or Debt Crowdfunding: Also known as peer-to-peer lending, individuals provide capital to businesses or individuals in exchange for interest payments and return of principal over a defined time period, similar to a mortgage or a car loan. LendingClub is a popular loan crowdfunding platform.
  • Equity Crowdfunding: Individuals make an investment in a new business venture in exchange for common or preferred equity. MicroVentures is an equity crowdfunding platform.

 

What does MicroVentures do?MicroVentures crowdfunding process

MicroVentures is an equity crowdfunding platform creating a marketplace for individual investors to make equity investments in startup and early stage businesses with small amounts of capital. At MicroVentures, we conduct extensive due diligence and write a detailed profile of each company we select as an investment opportunity. Potential investors are able to review the profile and solicit questions, which will be answered by one of our Series 7 licensed brokers.

MicroVentures pools the funds from each of the investors into a single limited liability company (“LLC”). Each of the investors becomes a member of the LLC allocated based on their percentage participation in the pooled fund. MicroVentures then uses the aggregate funds in the LLC to make an investment in the company or venture featured in the offering. The LLC is issued equity, a convertible note or other investment securities.

As a result of this process, individual investors are able to gain exposure to venture capital investments, an asset class typically reserved for institutional investors, while investing as little as $3,000. Companies benefit from MicroVentures’ process through the pooling of all investors into a single umbrella. This structure provides a clean addition to the capitalization table and allows for smooth capital structure transitions as companies move through various life-cycle stages. Essentially, MicroVentures is democratizing venture capital investing while maintaining the same level of expertise and diligence expected of an institutional venture capital fund.

 

How does the Jumpstart Our Business Startups Act impact crowdfunding?

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act has facilitated a substantial reduction in the regulatory burden surrounding financing activities for small companies in public and private capital raising transactions. right_rail_investThe primary objective of the JOBS Act is to incentivize capital formation for small businesses, thereby increasing employment in the broader economy leading to robust economic growth in the United States.

The JOBS Act consists of seven sections, or Titles, all detailing certain provisions of the law.

  • Title I: Reopening American Capital Markets to Emerging Growth Companies
  • Title II: Access to Capital for Job Creators
  • Title III: Crowdfunding
  • Title IV: Small Company Capital Formation
  • Title V: Private Company Flexibility and Growth
  • Title VI: Capital Expansion
  • Title VII: Outreach on Changes to the Law

While each provision influences capital formation for small business in some capacity, Title II and Title III have a disproportionate impact specific to crowdfunding.

Title II of the JOBS Act is related to private placement transactions executed under Rule 506 of Regulation D. Title II charges the Securities and Exchange Commission with eliminating the general solicitation and advertising bans in connection with Rule 506 offerings. Prior to Title II, entrepreneurs seeking capital had to have a “substantial and pre-existing relationship” before including an investor in a private placement securities transaction . On September 23, 2013, Title II was implemented by the SEC allowing companies to advertise their offerings to potential accredited investors under the newly implemented regulation 506(c). By allowing issuers to solicit or advertise their offerings more publicly, the investor pool for startup capital has greatly expanded.

The most impactful provision to crowdfunding is found in Title III of the JOBS Act. Title III, once implemented, will effectively allow non-accredited investors to participate in the trading of securities for startup and unlisted companies, the financial product equity crowdfunding platforms use to facilitate investments in new business ventures. As it stands, equity crowdfunding is limited to accredited investors, individuals with $1 million in net worth or earning more than $200,000 per year. While Title III was passed with the JOBS Act, the SEC has yet to publish final rules, meaning market participants cannot take advantage of Title III. As a result, several states have sidestepped the SEC and introduced laws, each with different nuances, allowing intrastate crowdfunding for residents not meeting the federal accredited investor definition. Title III, once implemented, will dramatically increase the pool of available capital and increase capital formation for small business in the United States.

 

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