In fact, the enactment of the JOBS Act that will make it legal in the United States, is a top priority for the Securities and Exchange Commission. The goal of allowing equity crowdfunding among non-accredited investors is to increase the amount of investment capital available to startups in the United States.
The History
The Legislation
Why It Matters
The Potential
The Future of Equity Crowdfunding
Equity Crowdfunding has been around for hundreds of years, tracing back to ship merchants that would raise money for new voyages. Modern day crowdfunding can be traced back to the advent of the internet, with the first successful online campaign occurring in 1997.
The success of rewards based crowdfunding in the United States and Equity Crowdfunding internationally in countries like Australia, and the UK, led to a groundswell of support in America to pass legislation that improved entrepreneurs access to capital. This support led to the development of legislation known as the JOBS Act.
The JOBS Act was signed into law on April 5, 2012 and put into motion two key changes to the current funding landscape; 1. A removal of the ban on general solicitation, and 2. The removal of the accredited investor requirement.
The Removal of the Ban on General Solicitation. This is a key change as it will allow entrepreneurs to publicly talk about the fact that they are raising money for their business, albeit, while still being restricted to accredited investors. The expectation is that it will help remove key geographic and network barriers that currently exist for entrepreneurs raising capital.
Raising money now is similar to how it used to be selling personal goods. Before the advent of Ebay, you had garage sales and consignment shops, with your audience limited to your personal network and geography. When Ebay came around, it dramatically increased the exposure someone could get for their product, and therefore created a much more efficient market. People could now have more access to buyers and buyers had more access to sellers, creating a balanced and democratized market.
Removal of the Accredited Investor Requirement. This provision will increase the number of individuals able to legally invest in private companies from approximately 3.4MM Americans to over 200MM Americans.
With over 200MM Americans able to legally invest, the amount of capital available for investment would increase exponentially. To provide context, we will compare the amount of funding available to the wealth of American consumers.
Startups and small businesses are said to be responsible for 90% of the net new job growth in the United States. However, there is one key point of pain for most companies; access to capital.
Antiquated laws and regulations (sometimes dating back more than 80 years) have made the fundraising process arduous and costly, likely curbing a large amount of company development and growth.
The JOBS Act provisions will help improve the access to capital, hopefully spurring more entrepreneurial activity, and by way of that economic growth.
Funding Democratized. No longer will companies be heavily penalized for living in the wrong geographic location or not coming from a prominent background. Anyone, anywhere, with a good idea will have the potential to showcase their business.
More Funding. Giving entrepreneurs the ability to talk to more people about their opportunities will likely free up a great deal of funding on it’s own. However, the removal of the accredited investor requirement will open up trillions of dollars in dormant capital.
The current professional funding market is limited to less than $100BB per year. To put that into perspective, the net worth of the American Public is estimated to be over $57 Trillion. In fact, if Americans invested just 1/10th of what they gamble per year, that would equate to $55BB - more than angel investors and venture capitalists invest per year, combined.
While equity crowdfunding is still limited to accredited investors, the SEC is taking steps to implement the JOBS Act provisions. Many industry insiders estimate the legislation to be enacted by the end of 2015. Given the magnitude of the legislation and the risks the SEC is trying to mitigate, we anticipate it taking longer to be fully implemented.
Fundable is a software as a service funding platform. Fundable is not a registered broker-dealer and does not offer investment advice or advise on the raising of capital through securities offerings. Fundable does not recommend or otherwise suggest that any investor make an investment in a particular company, or that any company offer securities to a particular investor. Fundable takes no part in the negotiation or execution of transactions for the purchase or sale of securities, and at no time has possession of funds or securities. No securities transactions are executed or negotiated on or through the Fundable platform. Fundable receives no compensation in connection with the purchase or sale of securities.