In the past, companies looking for alternative funding would have tried their luck with venture capital and private equity firms. But the advent of crowdfunding—which offers Main Street investors the ability to make equity investments in growing businesses—has given some companies a boost they might not have gotten from using the typical sources.
The Government-Business Forum on Small Business Capital Formation, set up by the U.S. Securities and Exchange Commission to facilitate fundraising for small businesses, suggests that historical fundraising paths may no longer offer the greatest prospects for success. In a paper published in June of this year, the Business Forum reported that online crowdfunding platforms offer greater access to capital and are more likely to provide the financing early-stage companies seek.
The Business Forum’s staff is working on a concept release to solicit market input about ways to enhance the crowdfunding process, while also maintaining protections for individual investors who may lack the investment savvy of their institutional counterparts. The concept release signals that regulators are increasingly accepting crowdfunding—which received government approval in October 2015—as a viable fundraising method. It also suggests that dominant online crowdfunding platforms such as Kickstarter and Indiegogo are likely to see new rivals emerge.
In the past, investment by individuals in PE funds, venture capital and other high-risk alternative investments was limited to those who qualified as accredited investors. The SEC defines an accredited investor as an individual with net worth of at least $1 million, excluding the value of his or her primary residence, or one with an income of at least $200,000 for the last two years. Under the JOBS Act of 2015, crowdfunding expanded access to private investment beyond accredited investors. If a non-accredited investor has an annual income or net worth of less than $100,000, the investor can invest the greater of $2,000 or 5% of the lesser of his or her annual income or net worth; if the investor has more than $100,000, then he or she can invest 10% of the lesser of its income or net worth.
Crowdfunding has now reached the stage where it can compete at every level of the fundraising market for private businesses. While the practice has historically been associated with seed-stage capital, it has become an increasingly credible option for more mature companies.
The Business Forum contends the investment limits for all investors should be lifted, provided the crowdfunded securities are verified, credible and regulated. Lifting restrictions will help the market grow by allowing for more individual investments, creating more participants in the alternative investment market, which has otherwise been an elite and difficult space to enter.
Early-stage funds seeking to list their portfolio companies on crowdfunding platforms may also stand to benefit; crowdfunding removes the need for back office processing of subscription agreements, driving cost efficiencies. Reducing redundant administrative tasks and decentralizing internal processes could ultimately increase deal volume and help funds maintain centralized compliance controls.