About two weeks ago, the SEC approved Title III of the JOBS Act. Title III allows for non-accredited investors to participate in equity crowdfunding.
The first question is "What is Crowdfunding?" It is the exchange of equity, gifts, or pre-sales for a small financial investment from a lot of people. For example, Kickstarter allows people who have a product or startup idea to raise money in exchange for pre-sales or other gifts.
What are the implications of this change? Initially only accredited investors could crowdfund for equity (ownership) in a company. Accredited investors are individuals with a net worth of $1MM excluding the value of their home or individuals that make over $200K a year. Now, any individual with any income can invest in companies for equity. Now, the average American can be an angel investor.
It's a very interesting, exciting, and worrisome concept all in one.
It's great because now startups can raise funds easily amongst a diversified list of investors. This opens up opportunities for all people in all walks of life to raise money for their startup. They can invite their friends and family to invest small amounts into their entrepreneurial dreams and then provide equity to those stakeholders. Also now any person can make investments in lucrative startups on crowdfunding platforms, not just the top 5% of Americans.
BUT I still have a ton of questions and worries about this. If you are a startup, what paperwork must you now fill out in order to complete a angel round? Do you end up with a cap table of 150 people for a small $20K raise. Do you have to distribute paperwork, updates, and approvals to all these people? If you crowdfund online, who is tracking whether investors are spending the correct amount of their yearly salary on investments. It's not in effect until 2016, so I will post again about this topic. Blog XVI