Much has changed within the world of investing for individuals whose income is $100,000 or less. In late 2015, the Securities and Exchange Commission (SEC) adopted rules that allow the offer and sale of securities through crowdfunding, and small investors are now permitted to invest through crowdfunding. Popular crowdfunding sites like Kickstarter and Indiegogo have diverged in the way they offer crowdfunding, which offers small investors even more options.
How have the rules for crowdfunding changed?
Before the SEC rule changes, crowdfunding was little more than a bunch of companies soliciting donations rather than taking out loans. You heard about a worthy project or business and donated money toward the cause, getting a hearty “thank you” or a small gift from the beneficiary. Some of these, like Oculus, went onto to be so successful that major corporations bought them out. Lots of others never got off the ground. But you tried to help out, right? Altruism was all.
The new SEC rules are a provision of the JOBS Act, a 2012 law championed by President Obama to boost start-up businesses. Previous regulations with roots in the Depression had limited individuals making investments in most private companies to so-called accredited investors — people who, today, make $200,000 or more a year or are worth at least $1 million — and also blocked companies from seeking investors publicly.
Today the SEC still restricts individuals, but it’s those with an income or net worth of less than $100,000 to investing at most $2,000 each year, or a maximum of 5% of their yearly income or net worth. Private companies can raise up to $1 million a year from small investors without most of the reporting and auditing required of larger firms or companies raising more money. The new SEC rules:
- enable individuals to purchase securities in crowdfunding offerings subject to certain limits
- require companies to disclose certain information about their business and securities offering
- create a regulatory framework for the intermediaries facilitating crowdfunding transactions
Crowdfunding offerings can be made only through brokerage firms or Internet funding portals that must be registered with the SEC, a requirement that is meant to protect investors. The SEC continues to assess what kinds of companies use the crowdfunding offerings, how closely they follow the rules, and whether the new practice promotes the raising of capital while also protecting investors. In particular, the SEC requires intermediaries to:
- Provide investors with educational materials that explain, among other things, the process for investing on the platform, the types of securities being offered, and information a company must provide to investors, resale restrictions, and investment limits;
- Take certain measures to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with Regulation Crowdfunding and that the company has established means to keep accurate records of securities holders;
- Make information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
- Provide communication channels to permit discussions about offerings on the platform;
- Provide disclosure to investors about the compensation the intermediary receives;
- Accept an investment commitment from an investor only after that investor has opened an account;
- Have a reasonable basis for believing an investor complies with the investment limitations;
- Provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
- Comply with maintenance and transmission of funds requirements;
- Comply with completion, cancellation, and reconfirmation of offerings requirements.
The revised rules give small businesses an additional pathway to raise capital while also providing investors with important protections. Now startups can distribute equity, not just perks, to just about anyone who wants to invest. What’s the biggest change? If you so choose, you can to go to a crowdfunding site and come away with shares of stock rather than movie tickets or other small expressions of gratitude. The rules offer investors a potential windfall — or loss — as they aspire to be among the first to get a piece of the next amazing innovation.
“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” said SEC Chair Mary Jo White.
With the SEC rule changes, the two largest crowdfunding sources, Kickstarter and Indiegogo, have taken very different approaches to crowdfunding. Kickstarter reincorporated as a public-benefit corporation — a legal designation indicating that one of the company’s primary aims is in the name of the public good. Kickstarter continues to hold to its original mission to bring creative projects to life without the influence of profit as a motivating factor. Kickstarter is a for-profit entity, though, as it earns fees from every successfully funded project on its platform.
What is Indiegogo?
Indiegogo is quite different from Kickstarter. Calling itself a “launchpad for entrepreneurial ideas,” Indiegogo combines the nature of startup investments with an informed citizenry. “We see this as another component of democratizing funding,” says Slava Rubin, Indiegogo’s co-founder and CEO.
According to Rubin, the new SEC rules offer an “opportunity for everyone to get involved with funding their neighbors or some great new idea that they want to see come to life.” Indiegogo describes itself as “the place for entrepreneurial projects to move quickly from concept to market.” For example, Misfit, a wearable-technology company that got its start on Indiegogo, was acquired by Fossil for $260 million, and Rubin says campaigns like Misfit’s get backers excited in investing.
Partnering with Microventures, which launched in 2011, Indiegogo now has the support of an investment firm with $100M+ raised via investors. Microventures explains that it is positioned as the future of venture capital funding, facilitating investment in tenable entrepreneurial ventures and claiming that “more than 95% of investment opportunities are funded.”
Equity crowdfunding with Indiegogo lets anyone invest in innovative startups and growing companies by endorsing “ideas you believe in while potentially growing your wealth.” Launched in 2008, Indiegogo has raised over $1 billion alongside 250,000 people and thousands of companies, offering investment opportunities “to anyone and everyone.”
The benefits of Indiegogo crowdfunding for entrepreneurs
Every entrepreneurial idea requires resources to become a reality. In the past, small business loans were often difficult to land for up-and-coming entrepreneurs. Crowdfunding provides an alternative method to obtain the funds needed to launch an idea quickly and with the support of an engaged community. Moreover, many successful entrepreneurs have leveraged their market validation on Indiegogo to make a bigger product debut down the line, and market validation is one of the most powerful tools in the entrepreneurial world. Venture capitalists monitor crowdfunding platforms as a strategy for identifying novel projects with big potential. Traditionally an expensive and long process, validation is now faster, more scalable, and available to anyone bringing a new idea to life.
Crowdfunding is often more efficient than traditional methods to gather feedback and find valuable marketing insights. In many cases, insights from fans around the world have helped Indiegogo innovators to refine their ideas, think through their strategies, and go to market with solutions that make a bigger impact. With a global audience, crowdfunding can exponentially grow the market potential for a campaign. A single idea or concept can spread quite quickly, sometimes in mere minutes, with thoughtful marketing and this engaged audience.
How entrepreneurs can push ideas to the top of Indiegogo
Those seeking funding from Indiegogo fall into two categories: a project or a cause. Using the “gogo factor” — a proprietary algorithm that measures the activity in a campaign and drives the placements of projects on the site according to that data — Indiegogo measures a campaign’s ongoing success or lack thereof. Danae Ringelmann, co-founder of Indiegogo, calls it the “cream rising to the top,” an essential part of the transparency that allows a project to be truly democratic.
Ringelmann says the company has gathered years of data to know “what matters and what doesn’t” when it comes to a successful campaign strategy. As a result, several elements seem key to the “Gogo Factor.”
- Have a very clear and transparent funding goal and deadline. Be explicit with a statement of how much capital you are raising right now and the extent to which that capital will propel your project toward completion.
- Consider breaking up your funding into stages to make your project more manageable. Different phases can require different funding scenarios. If you move into a second stage of your project and can demonstrate how you’ve accomplished your stage one goals, you’re proving that you can run a business and are a quality investment. That will give your new investors confidence.
- Identify 10-15 trusted supporters to join your project as a host committee. Campaigns that raise the first 30-40 percent from people they know before stranger dollars start to come in are more likely to reach their targets. So soft launch your campaign by reaching out to people that know you and can validate you. Once that happens, amplify. Do a hard launch and start to reach out to friends of friends, bloggers, or influencers. People who invest in you will tweet about you, so their networks will naturally and organically discover you.
- Film a motivational campaign video and use it to personalize your story. Describe why your project is important and how it will change people’s lives. Show your enthusiasm, determination, and wherewithal by being honest. Just a little vulnerability can help you connect with your potential investors.
- Be proactive in getting the word out. Use a variety of social media and seek out ways to get your message recirculated through various platforms. Also, be sure to take advantage of the update feature on Indiegogo, which drives much more interest than campaigns that neglect to use them. Updates can include new video footage, insights into the campaign’s progress, and revelations about the project itself. Be creative. Infuse energy. Generate buzz to get people more eager and interested.
- Keep communicating, through good times and bad. You will imbue your investors with confidence if you’re upfront when stuff happens. Maybe your project deadlines were unrealistic; maybe material delays set you back unexpectedly. Be candid, because, if you don’t, your investors will be conducting their own due diligence, and they’ll find out. It’s better if it comes from you, unlike the recent Indiegogo story in the news about Moon Walker, which seems to have disappeared from contact with the public — and likely their investments.
Opportunities to pursue sustainability goals through Indiegogo investing
As a small investor, you can delegate your funds to socially responsible or environmental, social, and governance practice investments. If it’s SRIs you prefer, you’ll choose to exclude certain companies or even entire industries because their products or services are not consistent with a green philosophy. Or you might decide to be an active shareholder who’ll bring important issues to the attention of company management, gain media attention, educate the public, and influence positive changes in the way a particular business in which you invest is conducted.
Equity crowdfunding is a way for individuals to support sustainable startups in exchange for a share of the company’s value. As related by the Environmental Defense Fund Energy Exchange, 71% of surveyed individuals by Morgan Stanley express interest in sustainable investing. Of those, 65% expect to invest more in sustainable industries during the next 5 years. This can have huge implications for eco-entrepreneurs or for everyday U.S. citizens who want to become part of the quickly evolving decentralized renewable energy sector. Clean Energy Trust states that, although intentional investors, impact investors, or those worried about the impacts of climate change may all have different financial requirements for investing in a deal, more and more people are expressing how much they care about cleantech and how much they are interested in innovation in this area.
Cleantech is just one way you can invest in sustainable living. A search on Indiegogo produces the keyword “environment,” and with it come a wide array of possible sustainable startups. You can invest in bamboo charcoal “for a better future.” How about metal backyard composters? Maybe you’d like to help a brewery increase its solar collection or fund a solar sailboat project. Or help clean the environment through sustainable land-based seaweed systems. There’s always the alternatives to single-use plastics initiative. Wouldn’t you feel good funding an agro-ecology lab camp on the site of a former Negro League ballpark?
Clearly, Indiegogo offers tremendous opportunities for small investors to use their funds to make a difference in the future of the planet. And you can also make some dreams come true — just look at these picture of successful Indiegogo campaigns and the faces of the proud entrepreneurs. Wouldn’t you feel good to be part of one of these success stories?
If you’re interested in equity crowdfunding, check out “How Does Cleantech Equity Crowdfunding Work?” for even more ideas.
Photo Credit: Indiegogo
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