17 October 2017

Small Crowds Get Their Day in Investing Sun

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The rules, called Regulation A+, authorize an existing provision of the 2012 Jumpstart Our Business Startups Act, or JOBS Act, which set out to ease securities laws on equity crowdfunding and other fundraising tools for new ventures. Until now, that law has limited to accredited investors—those who earn over $200,000 a year or have a net worth of at least $1 million—the ability to buy shares through crowdfunding campaigns.

Taking stakes in early stage companies allows investors to pursue outsize gains in the event they find startups that enjoy rapid growth or later go public. These equity-based crowdfunding platforms are different from other “social” crowdfunding websites like Kickstarter and Indiegogo, which offer backers other forms of rewards.

Beginning in September 2013, more than 1,700 companies have raised over $700 million through equity crowdfunding, according to Crowdnetic, a firm that tracks about 18 of the industry’s most popular crowdfunding sites. In the three months ended March 31, accredited investors committed $161 million to startups through those sites, more than three times the amount from the same quarter a year ago. There are roughly 80 crowdfunding sites but many are largely inactive, according to Crowdnetic.

Though popular, crowdfunding sites have also attracted complaints for failing to protect backers from project creators who renege on promises or disappear entirely. In part to protect investors, the SEC’s new rules require companies to disclose financial results, produce audit reports and meet additional state or federal requirements, depending on how much they want to raise. Some argue the cost of compliance, which could reach $100,000 to initially register, will discourage young companies from raising money this way.

Crowdfunding lawyers and advisers said registering under Regulation A+ rules would only make sense for more established companies seeking at least several million dollars in capital. They say smaller ventures are better served fundraising through other offerings. AngelList is one of many platforms and issuers waiting for the SEC to finalize another JOBS Act provision, targeted at startups who want to raise less than $1 million. They expect the pending regulations to carry fewer restrictions on equity crowdfunding. The SEC declined to comment.

On Friday, crowdfunding site SeedInvest will unveil a handful of companies it hopes will appeal to a mass audience of nonaccredited investors. Roughly two-thirds of SeedInvest’s 28,000 investors are nonaccredited, including nearly 3,000 who have signed up since the SEC announced its new rules in March, according to Mr. Lingam. In a recent SeedInvest survey, over half of them said they are likely to invest over $10,000 a year after the rule change.

Click here to access the full article on The Wall Street Journal.

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