The Jobs Act legislation that permits equity crowd funding was approved by the SEC in July 2013 and went effective this week. This legislation allows companies to publicly solicit equity investment from accredited investors. The key legal change permits "public solicitation" of investors without the need to use registered securities brokers and their big brothers the investment banks.
Crowd funding was perhaps first popularized by Kickstarter, which prior to the SEC approval used the model to raise donations for projects. It has quickly been copied to raise money for charities, scholarships and other worthy causes. (I believe that Vittana was the first organization to use crowd funding, to provide student loans outside the U.S.)
Two noteworthy equity crowd funding platforms are AngelList and CircleUp. AngelList focuses on tech startups and investment opportunities are organized by syndicates, backers and accelerators. A sample backer at AngelList is Jason Calcanis and a sample accelerator is Techstars Austin 2013. In either example, an investor would participate in all the investments made by Jason or Techstars Austin. Such diversified investment is critical in early stage investing given the risk (and in any other investment portfolio).
CircleUp focuses on consumer products and investors select individual companies to invest in. One interesting feature of CircleUp is that it promises "access" to partners such as P&G and General Mills.
The evolution of equity crowd funding will be interesting to watch and I see several trends developing:
- Celebrity platforms, where an investor can invest in Lady Gaga or Jay Z's angel investment deal flow
- Special purpose platforms, such as social entrepreneurship, universities (to commercialize their research projects), broadway plays, etc.
- New incubator funding, such as soliciting alumni to underwrite an incubator for equity investment in student startups (FIU immediately comes to mind)
There will also be many new spinoff opportunities such as rating agencies for crowd funded equity funds, "mutual funds" for equity crowd funding so investors can invest in 10-20 funds and, of course, the new consultants, marketing experts and newsletter offerings. (There is always an opportunity for more pundits and "experts" :)) An opportunity that I find interesting is to build the software infrastructure and website support for the equity crowd funding organizations. A Red Hat, open source, "best of class" model might have a real future if this funding model becomes as popular as I think it might.
The issue that equity crowd funding needs to handle well is the due diligence process for each investment. While a site like AngelList has very experienced investors behind it such as Jason Calcanis and Techstars, most sites should document a rigorous due diligence process to reduce the risk of fraud. Personally, I never thought that the SEC would see past this risk and approve the necessary regulation, but apparently the Obama White House gained meaningful securities law experience sorting out the financial crisis of 2008. (The other issue of some importance may be "conflict of interest". How does a celebrity or lead investor decide which investments they offer to the "crowd" and which ones they keep for just themselves.)
As I understand the new regulations I may no longer be required to post a warning, but....I do not provide investment advice and this post is not a solicitation for investment in any organization mentioned here.
Additional articles on equity crowd funding:
- SEC Finally Moves On Equity Crowdfunding, Phase 1 (Forbes--most recent in a series of good articles on equity crowd funding)
- How much will this change venture capital? (Jason Calcanis--lesser quality firms are going to disappear)
- Leading vs Following (Fred Wilson--the importance of the lead investor in equity crowd funding)