The Top 3 Benefits of Equity Crowdfunding to Entrepreneurs and Investors
August 9, 2018
Regulation Crowdfunding, or “Reg CF” of the JOBS Act (Jumpstart Our Business Startups) allows startups and small companies to raise capital from anyone, not just accredited investors. As a result, ordinary people whose income or net worth don’t meet the SEC's standards of accreditation are able to participate in investments which were previously available only to the wealthy. This has enormous implications both for entrepreneurs and investors.
Top 3 Benefits to the Entrepreneur
1. Wider pool of investors The JOBS Act has vastly widened the pool of investors available to entrepreneurs. Regulation CF under Title III of the JOBS Act allows private companies to raise up to $1,070,000 from non-accredited investors. Before Regulation CF, investments in private companies were available only to wealthy individuals or venture capitalists, which limited the pool of potential investors to only 3% of the population. The passage of the JOBs Act opened up the other 97% as possible investors. Now anyone can invest!
2. Raise equity without the regulatory burden and cost of running a public company Equity crowdfunding lets you sell equity without the hassle of doing an IPO and then running a public company. As the CFO of a public company, I can tell you from experience that the burden of managing a public company is huge; the time and expense involved in producing lengthy and detailed required quarterly and annual filings, in addition to compliance with disclosure requirements, are enough to prevent many companies from going public.
3. Raise capital for minimal cost Legal costs for traditional fundraising can run up to $20,000 or more. Funding portals such as netcapital.com keep these costs to a minimum by offering standardized legal documents. They do charge a success fee, which is a small percentage of the proceeds raised, but that is only paid only if you reach your minimum fundraising goal.
Top 3 Benefits to the Investor
1. Access to promising early-stage investments Previously, the average person had to wait for a company to go public. The passage of the JOBS act allows anyone to get in on the ground floor of the next Amazon or Google. If the company is successful, the return can far outweigh the risk.
2. Small minimum investment Some funding portals allow you to invest as little as $5. For what you might pay for a cup of coffee, you can own an equity stake in a company that may someday be sold or go public.
3. Ability to create a diversified portfolio With the minimum investment size so low, the average person can reduce risk by creating a diversified portfolio of private companies for a small amount of money.
Looking for more information on Equity Crowdfunding? Download our free Complete Guide to Equity Crowdfunding