How Securities Crowdfunding Could Change the Way You Invest

by Miranda Marquit · 2 comments

As technology advances, more people have access to investment opportunities than ever before. Just about anyone with $25 and an internet connection can open a brokerage account and start trading on the stock market. The next evolution in investing could very well be “securities crowdfunding,” in which ordinary people have opportunities to invest in small businesses and startups with greater ease.

“There are expectations that at some point in 2014, securities crowdfunding will become legal for all investors,” says Chris Tyrrell, the CEO of crowdfunding platform OfferBoard. He’s referring to a law passed not too long ago that allows for securities crowdfunding.

Right now, businesses looking to leverage social fundraising for their businesses use sites like Kickstarter and Indiegogo. However, this isn’t investing. Those who contribute to such campaigns receive no ownership in the business and are issued no stock. Instead, they’re offered “thank you” gifts and perks.

What Is Securities Crowdfunding?

Securities crowdfunding would be different. Businesses could use this model to raise money and offer investors ownership in the company. In fact, certain investors already have access to this type of investment.

“Title II of this legislation deals with accredited crowdfunding, and became legal on September 23, 2013,” Tyrrell explains. “Accredited investors are those with more than $1 million in net worth or an individual income of $200,000 per year.”

Right now, these investors are the only ones who can take advantage of the new crowdfunding rules. But for them, it provides opportunities that were previously only available to venture capitalists and angel investors. According to Tyrrell, “Crowdfunding platforms like OfferBoard offer investors the ability to find middle market companies that are growing, commercializing, and recapitalizing.”

Everyone’s Invited

The next stage of the crowdfunding law, though, would include everyone. “The Title III section of the law is still in review,” says Tyrrell. “It will be in comment period until February 3, 2014, but there seems to be an interest in getting it approved quickly.”

Title III crowdfunding will be aimed more at helping startups and other early-stage businesses. These businesses will be able to raise funding through small investments from individuals, and they can raise up to $1 million this way. “And anyone can invest,” Tyrrell says. “It’s not just for accredited investors. Anybody can invest in a startup and take the chance of seeing a good return.”

Of course, turning everyone into a venture capitalist comes with risks. This is part of the reason that the wider provisions of the crowdfunding bill are delayed — compared to those offered to accredited investors. “Regular” investors are less able to absorb the risk that comes with investing in early-stage companies.

How You Can Get Involved

For investors looking to diversify a little bit by investing in small business, however, the new crowdfunding rules could come as a boon. As long as you complete your due diligence, and focus on solid companies with good business plans, you could expand your portfolio to include these types of publicly offered private securities.

Securities crowdfunding is also likely to help businesses. “Now you can go advertise to a wider base,” says Tyrrell. “You have broader network access, and this can help early-stage companies raise money early on.”

What do you think? Would you participate in securities crowdfunding?

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  • property marbella says:

    karynne is absolutely right that small investors and individuals often do not have the knowledge to be able to invest themselves in these companies. Let the educated and well informed with knowledge manage your investments, it pays off in the long run.

  • Karynne Summars says:

    This comes with a lot of risk for both sides. Will the ordinary investor, who may not be financially savvy, be able to interpret the financial statements, cash flow, etc and understand the risks s/he is taking?
    How would these investors be able to make judgment and be sure about the qualifications of the management of a company, which is a key consideration when investing? Will they get the opportunity to meet with the management in person before investing?
    Will the companies seeking equity investors be required to provide audited financial statements prepared by a reputable accounting firm?
    What about the legal documentation (PPMs, etc)?
    Can another company invest in the company seeking to sell equity or only individuals?
    As far as the company, which may be a start-up, seeking funds is concerned, they may be dealing with inexperienced investors, which could be a nightmare as to financial reporting and educating these investors about the company, its products and projections.
    Once equity is involved even minority shareholders can be difficult to deal with if they decide to oppose you.

    Seems to me there could be a lot of room for problems down the road for both sides, especially when a start-up company and not really savvy investors come together, which would only make lawyers happy in the long run.

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