Crowdfunding is a trendy and cool buzzword. “Crowd” sounds sociable and “funding” is, of course, always good. But equity crowdfunding as contemplated by rules proposed by the SEC in late October is not promising.
Because it sounds good, the term “crowdfunding” is applied, sometimes confusingly, to vastly different funding models, including “donation funding,” (e.g. Kickstarter), in which no investment is involved and “backers” expect no return; “advertised” private offerings, which have only been legal since September and allow the general solicitation of investors directly by private companies seeking funding, known as “issuers”, or through intermediary sites like CircleUp, provided all investors are “accredited” (meaning wealthy); and “real” equity crowdfunding contemplated by the JOBS Act, which I describe here. This last model would allow non-public issuers to sell securities to anyone, regardless of their sophistication, net worth, or income, and no matter how risky, albeit in limited amounts and with many restrictions.
Image: http://www.forbes.com
