Crowdfunding is when a project is funded by raising many, small financial investments from a large number of people (the crowd), usually through the Internet. This alternate way of raising funds has quickly gained the attention of investors, inventors, charities, artists, groups, entrepreneurs and businesses in all stages of growth. There are three types of Crowdfunding, Reward, Donation and Equity. This is the third in a three-part series that will take a closer look at each of these types of crowdfunding.
Equity Crowdfunding is very appealing for growing businesses – securing needed capital through investors online in exchange for equity or profit sharing.
It is also appealing to the small investor – investing a small amount of money for a return on that investment through the Internet. The appeal is that many more, smaller investors can invest, get into the market quickly, and at a low entry cost.
This new model is ideal, a regular person can invest through crowdfunding, however that it is not the way Equity Crowdfunding works at this time. Currently, only Accredited Investors may invest for an equity stake in a company through a Crowdfunding Campaign.
The SEC defines an Accredited Investor (under Regulation D), but basically for individuals, they must be registered as accredited and fit into the criteria below:
(1) An individual with a net worth, or joint net worth with the person’s spouse that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.
(2) An individual with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
As you can see, an accredited investor must have an annual income of $200,000 and/or $1 million in assets. They are allowed to fund one or several companies as long as they remain within 5% or 10% of their annual earnings ($100,000). Moreover, an investor must wait 12 months before selling their securities unless the sale is to a family member, the issuing company, or an accredited investor. Currently, the SEC is finalizing this process so that it extends to non-accredited investors.
When contemplating doing an equity crowdfunding campaign or investing through such a campaign, it is critical that you secure the help of professionals. You will need to obtain reliable advice on how to proceed and follow the law from someone experienced in selling equities and structured deals.
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