Equity crowdfunding prepares to disrupt U.S. markets
By Jordan Phoenix, CSI Reporter
New York City - Crowdfunding has become somewhat of a revelation for creative and business-savvy types all around the globe over the past few years. The amount of collective funds raised worldwide via crowdfunding platforms has nearly doubled year over year recently; jumping from an estimated $1.5 billion in 2011, to $2.7 billion in 2012, all the way up to $5.1 billion in 2013.
From prototypes for inventions, to video games, to books, films, and social causes—a wide array of new possibilities have opened up; consequentially creating vital new opportunities for entrepreneurs and activists at a time where unemployment and inequality remain among the largest global challenges to be addressed.
While much progress has been made in terms of new doors opening up in the crowdfunding arena, we’re on the verge of seeing an entirely new dynamic emerge in this realm in the United States. Back in April of 2012, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. This act required the U.S. Securities and Exchange Commission to begin studying more efficient ways to give companies access to capital, in order to write rules that can both protect consumers and accelerate progress without regulations that are overly burdensome.
Two years later, the results of this process are expected to be formally written into law. A major change involves the allowance of a new type of crowdfunding practice that is already underway in Europe: crowdfunding for equity. Rather than simply giving money towards a product purchase or cause, crowdfunding for equity enables individuals to invest in an idea and become partial owners of that venture. If the business becomes a thriving enterprise, the investor can be rewarded financially for their willingness to transfer their funds into an early stage concept.
Sang Lee, the CEO and Founder of Return on Change (RoC), has been working in conjunction with CrowdFund Intermediary Regulatory Advocates (CFIRA) in Washington D.C. in order to take part in the process of revising the laws. Lee predicts that new laws permitting organizations to engage in crowdfunding for equity are expected to become official in mid-2014.
“This could really open up the floodgates for small businesses,” Lee says, “since right now around 98% of startups that seek to raise venture capital from traditional investment banks are rejected.”
He adds, “2014 will be an exciting year, with equity crowdfunding for the general public opening up in the latter half of the year. The comment period on the proposed regulations were closed as of February 3, 2014, and now we’re in the final stretch!”
The pool of accredited investors in the United States to seek funding from is currently extremely limited, as only larger organizations and people with at least $1 million in net worth or an annual salary of over $200,000 in each of the two previous years can become an accredited investor. This has created a situation whereby many of America’s brightest and most ambitious innovators are largely stuck in the mud, unable to gain the resources and traction necessary to bring their ideas to life, while also unable to find high growth jobs to consider self-funding their ventures either. Crowdfunding for equity aims to eliminate this dilemma by opening up a much larger pool of investment capital for those aspiring to implement ideas that can improve our world.
Return on Change, a founding member of the Centre for Social Innovation in New York City, is uniquely positioned to become an early pioneer in the equity crowdfunding space once the green light is officially given from Washington. Director of Brand Development Grace Kim states that Return on Change’s mission is to bring together investors with startups in the fields of: life sciences, technology, edtech, cleantech, and social enterprises; industries that can massively improve the quality of life for countless people and the environments they inhabit.
When hopeful startups apply to appear on Return on Change’s platform, they must first pass through a curation phase before being able to raise funding. This allows the site’s users to validate a startup’s business model, in order to ensure that the investments listed are sound and in high demand.
According to Lee, “We have already received over $34 million in capital that startups are seeking through our platform, and over $1.5 million of investor interest and commitments in these companies.”
One organization that hopes to benefit from the upcoming equity crowdfunding law changes is Iroquois Valley Farms, another founding member of the Centre for Social Innovation. Based in Illinois, Iroquois Valley Farms connects investors with farms that engage in organic food production. Having now expanded into Indiana, Michigan, and New York, their goal is to provide family farmers with the stability of indefinite long-term leasing or outright purchasing options for their land, so that they can utilize it in the most sustainable and environmentally friendly ways. When small and mid-sized farms do not own their land outright, they can often be forced to move when their leases expire, preventing them from partaking in strategies that promote best practices for the land in the long-term.
Kevin Egolf, Director of Business Development for Iroquois Valley Farms, states that the organization could certainly benefit from raising additional funds of up to $1 million per year from non-accredited investors, which could help them expand operations further across the Mid-Atlantic region. He believes that the shifting laws can have massive implications that go beyond just his own organization; empowering family farmers all across the country to take matters into their own hands and seek capital to provide themselves with the conditions to operate optimally.
With crowdfunding on the verge of what seems to be an even larger expansion this year, we can only begin to imagine all of the new organizations—and even entire industries—that may arise from it.