Since Title III of the JOBS Act went into effect in 2016, equity crowdfunding has offered new opportunities for entrepreneurs and investors alike. Entrepreneurs are no longer limited to traditional sources of funding, and early-stage startup investing has become more accessible to the masses.
While equity crowdfunding is still in its relative infancy, we’re taking a look at how it has already made an impact on startup innovation, as well as the implications of potential changes to crowdfunding regulations.
The Current State of Equity Crowdfunding
Over the last couple of years, equity crowdfunding has seen steady growth. According to a report by Massolution, equity crowdfunding could reach $36 billion by 2020, eventually surpassing venture capital in value. As a gamechanger for startup founders that may have struggled to source funding otherwise, this comes as no surprise.
Traditional Funding Hurdles
Crowdfunding has grown as a means of funding, in part, due to the many barriers to more traditional funding sources. The more new or unique a business idea is, as startup ventures often are, typically the more difficult it is to convince investors of its value.
Many small businesses have found that a successful equity crowdfunding campaign can be helpful in documenting market demand for their business to traditional funding sources such as VC’s and banks. And because startups are able to market and publicize their funding efforts, they’re reaching not only average investors and everyday consumers, but possibly VC’s that may not have had them on their radar before.
Currently, SEC regulations dictate that the maximum aggregate amount of funds a company can raise through equity crowdfunding is $1.07 million over a 12-month period. Some claim that certain costly and complex SEC requirements may place an undue burden on small businesses who are seeking small amounts of capital, arguing that extending exemptions to these smaller ventures may make equity crowdfunding a more attractive option to those who stand the most the gain.
Congress is considering reforms to help resolve some of these issues in the JOBS Act 3.0, which has passed the House and is waiting on Senate action. Among other things, the act proposes raising the cap a business can raise in 12 months from $1.07 million to $5 million. For some startups, this could completely cut out the need for traditional sources of funding. The act also proposes the following:
- Allowing investors to solicit interest from investors prior to filing with the SEC
- Clarifying the liability of equity crowdfunding portals
- Amending filing requirements
- Allowing the use of special purpose investment vehicles
Despite the regulatory hurdles startups may currently face, equity crowdfunding still offers startups and small businesses more avenues to capital. That said, these reforms could refine the process and open equity crowdfunding up to even more entrepreneurs.
Democratization of the Funding Process
Arguably, one of the most advantageous aspects of equity crowdfunding is that it democratizes the funding process, leveling the playing field for entrepreneurs. Silicon Valley holds the purse-strings no longer, and with fewer gatekeepers, the path to innovation becomes clearer for those who aren’t already wealthy or well-connected. This lets the best ideas rise to the top while removing barriers for those who have struggled to acquire funding from traditional funding institutions.
Historically, minority founders have had difficulty in finding funding from traditional sources. In fact, Fortune reported that female founders received only 2% of venture capital funds, a mere $1.9 billion of the $85 billion total invested by VC’s in 2017.
While this gender disparity certainly negatively impacts female founders, it has a detrimental effect on innovation as a whole. Our future can be impacted significantly by the ideas and companies investors choose to back, and when we fail to diversify, we are limiting our own potential for innovation.
Over the last few years, the funding gap has grown smaller. In fact, a report conducted by MBDA found that between May 2016 and May 2017, 17% of Regulation Crowdfunding filings listed a female signing executive. While that is certainly a step in the right direction, there is still significant progress to be made in terms of equitable funding across communities that have been historically underfunded and underrepresented.
Equity crowdfunding has the potential to clear the path to a level playing field. And if the funding cap is raised to $5 million, we could see even more small businesses turn to equity crowdfunding as their primary source of funding.
The Future of Equity Crowdfunding
There is no doubt that equity crowdfunding is a viable funding model that has made a significant impact on startup innovation, and we look forward to seeing how it continues to positively impact the venture landscape. With the possible reforms included in the JOBS Act 3.0, we’re hopeful that should the bill be passed and signed into law, even more small business will be able to take advantage of equity crowdfunding, contributing towards long-term innovation and economic growth.