What is Equity Crowdfunding & the History Behind It?
For decades, investing in private startups and early-stage companies was an opportunity largely limited to wealthy accredited investors and venture capital firms. However, the emergence of equity crowdfunding has opened up this once exclusive arena, allowing anyone to invest in ambitious entrepreneurial ventures.
What is Equity Crowdfunding?
Equity crowdfunding refers to the online process of raising capital from a "crowd" of investors in exchange for equity ownership in a company. Rather than going the traditional route of seeking funding from a few institutional investors, startups can now directly market investment opportunities to the general public over the internet.
Through regulated equity crowdfunding platforms, companies can offer shares of ownership to both accredited and non-accredited investors at varying investment levels. This democratizes access to private market investments that were previously out of reach for most retail investors.
The Origins and Evolution
While crowdfunding itself has very old roots, such as funding the base of the Statue of Liberty through small public donations in the 1800s, the modern concept of equity crowdfunding is relatively new. Its origins can be traced back to the early 2000s with the rise of online reward-based crowdfunding platforms like ArtistShare for creative projects.
However, equity crowdfunding faced significant regulatory hurdles in the United States until the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012. This legislation paved the way for startups to raise capital by selling equity stakes online to accredited investors under certain rules.
The real game-changer came in 2016 when Title III of the JOBS Act allowed non-accredited investors to participate in equity crowdfunding as well, albeit with investment caps and other regulations. This opened the floodgates for retail investors to buy ownership stakes in startups and private companies.
Major Equity Crowdfunding Platforms
Following the regulatory green light, a number of equity crowdfunding platforms quickly emerged to facilitate online investing in startups, including:
Wefunder: One of the first approved funding portals, allowing investments as low as $100.
StartEngine: Raised over $200M for startups, with unique offerings like investing in StartEngine itself.
Republic: Backed by renowned investors, with a focus on due diligence and investor education.
Netcapital: Facilitates Reg CF, Reg A+, and Reg D offerings across various industries.
These platforms provide services like investor accreditation, deal vetting, investment processing, regulatory compliance, and startup marketing. While the risks are high, equity crowdfunding gives investors early access to potentially groundbreaking startups and trends.
The Future of Equity Crowdfunding
As equity crowdfunding continues gaining mainstream adoption, some key trends are emerging:
Secondary trading markets for enhanced liquidity in private shares
Vertical niche platforms focusing on specific industries like real estate, cannabis, etc.
Increased regulatory clarity and internationalization of rules
Integration with blockchain, crypto assets, and decentralized finance models
Overall, equity crowdfunding represents a paradigm shift in startup financing. By opening up investment to the masses, it fosters a more inclusive and innovative entrepreneurial ecosystem. As the industry matures, equity crowdfunding is poised to play an increasingly pivotal role in shaping the future of private capital markets.
