Equity crowdfunding may finally be emerging as a transformative way for individuals to invest in startups and small businesses, democratizing access to investment opportunities that were once limited to wealthy investors. With the rise of intrastate crowdfunding, which allows local businesses to raise capital from in-state investors, this investment model has become even more accessible. This post will guide you through the process of investing in equity crowdfunding.
A Brief History of Crowdfunding
The roots of crowdfunding can be traced back to the 1700s, but modern crowdfunding began taking shape in the late 1990s. The first recorded instance of online crowdfunding occurred in 1997 when the British rock band Marillion funded their U.S. tour through fan donations. This innovative method inspired the creation of dedicated platforms, with ArtistShare launching in 2000 as the first crowdfunding platform.
The Rise of Regulation Crowdfunding (Reg CF)
In April 2012, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law, which aimed to facilitate capital formation for small businesses. The JOBS Act legalized equity crowdfunding by allowing companies to raise funds from non-accredited investors in exchange for equity shares. This legislation marked a significant shift in the investment landscape, providing entrepreneurs with a new funding avenue while enabling everyday investors to participate in early-stage investments.
The SEC took time to finalize regulations under the JOBS Act, leading to the official implementation of Reg CF in May 2016. Under Reg CF, companies can raise up to $5 million within a 12-month period through registered crowdfunding platforms. This regulation also mandates transparency and investor protections, ensuring that companies provide adequate information about their business and financial status.
Intrastate Crowdfunding: A Local Approach
As Reg CF was being established, many states recognized the need for more localized funding options. Intrastate crowdfunding laws began emerging as a response to the delays and regulatory burdens associated with federal regulations like those imposed by the JOBS Act. At present, thirty-five states and the District of Columbia had enacted intrastate crowdfunding laws that allow businesses to raise capital from local investors without adhering to federal registration requirements.
Intrastate portals enable small businesses to solicit investments from residents within their state, often with fewer compliance costs and regulatory hurdles compared to federal offerings. These state-based laws allow companies to raise capital directly or through intermediaries such as online platforms or broker-dealers.
How to Invest in Equity Crowdfunding
1. Research Your State’s Regulations
Before diving into intrastate crowdfunding, it’s essential to understand your state’s specific laws regarding investment limits and eligibility requirements. Resources like the NASAA Intrastate Crowdfunding Directory can provide valuable information about your state’s regulations.
2. Choose an Equity Crowdfunding Platform
Select a reputable crowdfunding platform that aligns with your investment interests and operates within your state. Some popular platforms include:
- Wefunder: Connects investors with early-stage startups.
- StartEngine: Offers a wide range of investment opportunities across various industries.
- Republic: Focuses on community-driven investments.
For intrastate offerings specifically, consider platforms such as:
- Nextseed: A Texas-based platform focused on local businesses.
- Michiganfunders: Open to Michigan residents investing in Michigan firms.
- Trucrowd: A Chicago-based platform facilitating intrastate investments.
3. Create an Account
Once you’ve chosen a platform, create an account by providing personal information and verifying your identity. Depending on the platform and your state’s regulations, you may need to self-certify as an accredited or non-accredited investor.
4. Explore Investment Opportunities
Browse through available campaigns on the platform. Each listing will provide detailed information about the business, including its mission, financial projections, market analysis and management team backgrounds.
5. Review Investment Terms
Before committing funds, carefully review the investment terms outlined in each campaign. Understand the type of security being offered (e.g., equity shares or convertible notes) and any rights associated with your investment.
6. Decide on Your Investment Amount
Determine how much you want to invest based on your financial situation and limits set by your state’s regulations.
7. Make Your Investment
Once you’ve selected a company and decided on your investment amount, follow the platform’s process to complete your investment.
8. Monitor Your Investment
After investing, keep track of your investment’s performance by staying engaged with company updates provided through the platform.
But understand that Investing in startups through equity crowdfunding carries inherent risks:
- High Failure Rate: Many startups do not succeed.
- Illiquidity: There is often no secondary market for selling shares.
- Dilution Risk: Future funding rounds may dilute your ownership percentage.
Conclusion
Equity crowdfunding presents a unique opportunity to invest in innovative startups while supporting local businesses through intrastate portals. With its roots dating back centuries and significant developments like Reg CF and intrastate laws shaping its current landscape, this approach allows individuals not only to diversify their portfolios but also to contribute meaningfully to entrepreneurial ventures within their communities. By understanding regulations, choosing the right platform, conducting thorough research, and being mindful of risks, you can navigate this exciting investment landscape effectively.