The Present and Future of Equity Crowdfunding

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Title III of the JOBS Act brought a lot of hope to entrepreneurs across the United States. Signed into law in 2012, the various titles were meant to make it easier for start-ups to get the money they needed to begin operations. Up to 98% of jobs in the US come from small businesses, so the stimulus of the JOBS Act made a lot of sense.

That was in 2012. Since then, Title III has been held in an uncertain state of purgatory ever since. The Security and Exchange Commission [SEC] has proposed rules for Title III, but proposed rules are very different that real rules. It won’t be until October 2015 before those rules are likely to be reviewed, which means it could be 4 years from the signing of the law to the implementation of it for equity crowdfunding to become a reality for everyone

What Is the State of Equity Crowdfunding Right Now?

Equity crowdfunding is actually available right now. It’s non-existence is a common misconception that people have thanks to how effectively the SEC has been dragging their feet. To qualify as an accredited investor and get involved in this part of the US crowdfunding world, there must be a liquid net worth of at least $1 million. Investors must also be able to document a minimum annual income of $200,000.

There are over 8 million accredited investors in the United States right now. It seems like equity crowdfunding should be moving along pretty swiftily, but it is not. Out of those 8 million investors who can participate in equity crowdfunding today, only 240,000 of them are actually doing it. When that figure is put to the entire US population, it means the equity crowdfunding market share barely hits 0.1%.

Would you start a business and seek equity crowdfunding if there was a 99.9% chance of failure? Of course not. Yet that is the state of the current crowdfunding sector for equity. This is why Title III is so highly anticipated.

What About the Future of Equity Crowdfunding?

When [If] Title III becomes law, then the face of equity crowdfunding will change forever. Start-ups will be able to raise up to $1 million from non-accredited investors, who themselves will have limits to how much of their income they’ll be able to invest. Every year the $1 million cap will start over.

Why is this good news? Just ask the average Baby Boomer right now. 2 out of 3 of them haven’t saved enough yet for their retirement, yet all of them are now above the age of 50. With 15 years or less to make up the difference and many of them not having any savings resources of which to speak, equity crowdfunding provides a real opportunity for massive gains.

The limits are in place because equity crowdfunding also provides a real opportunity for massive losses. When Baby Boomers are taking care of their aging parents and dealing with their children who are also likely living at home right now, they’re caught between a rock and a hard place. 2016 gives many of them a potential escape route.

Equity Crowdfunding in 2016: What Will It Look Like?

Crowdfunding has proven one principle above any other in whatever form it is being used: people love to support a winner. They also love keeping as much of their money as possible. Today’s equity crowdfunders are really just broker-dealers. Only accredited investors can use them and they’re going to charge either a flat monthly fee or a success fee that can be as high as 8%.

If you’ve got $2,000 that you’re allowed to invest, the $160 that comes out from an 8% is a lot of cash to pay. There are 401k plans that don’t have that large of a service fee out on the market today.

It is also going to be an all or nothing deal. Equity crowdfunders are going to be stuck with their investors and the investors may be stuck with their investment. It is going to be a long-term investment period that can build up some fast wealth, but it may not be fast enough. Because of this, the selection of campaigns is likely to be more strict, like in the early days of Kickstarter. One current platform owner says they accept just 2% of the pitched projects.

2016 looks to be a big year for equity crowdfunding. If non-accredited investors spend the time between now and then learning the rules of this private investing world and start practicing how to perform their due diligence, then when the Title III rules are finally released, it will be easy to match investor to start-up.