Until recently, crowdfunding was seen as an effective way to request donations on the Internet. A filmmaker might launch a campaign on Kickstarter.com to raise money for a documentary. A volunteer could use Facebook to solicit donations for a nonprofit. People who gave to a crowdfunding campaign might be compensated with free products, souvenir T-shirts or movie tickets.
Today, companies are starting to use crowdfunding as a form of alternative financing. Equity crowdfunding emerged last year when the U.S. Securities and Exchange Commission loosened rules governing how businesses can seek investments. New rules under the 2012 Jumpstart Our Business Startups (JOBS) Act now allow companies to advertise for “accredited” investors. The SEC defines these investors as individuals who make more than $200,000 a year or households that have a net worth of more than $1 million.
in many states, even novice investors are able to buy stakes in companies through crowdfunding. The SEC is expected to open up equity crowdfunding to “mom and pop” investors nationwide, with no limitations on their wealth. That could happen as soon as 2016, the SEC has estimated. In the meantime, 24 states have passed legislation that opens up equity crowdfunding to non-accredited investors. Colorado, for example, recently approved a law that allows businesses to raise as much as $1 million through equity crowdfunding. Non-accredited investors in Colorado are limited to individual investments of $5,000 under the new law, which takes effect in August 2016.
The move toward regular investors may revolutionize how companies raise money. Currently, equity crowdfunding is mostly used by tech start-ups. However, real estate firms, restaurants and other businesses have recently gotten into the game. In 2014, the Hard Rock Hotel in Palm Springs, Calif., announced it raised more than $1.5 million through two months of equity crowdfunding. In Kansas, which was the first state in the country to pass an equity crowdfunding law, residents in the small town of Minneola used crowdfunding to invest in and open a new grocery store.
Your company may not be a Silicon Valley start-up or a destination resort. Still, equity crowdfunding could soon be an effective form of alternative financing that helps traditional companies raise cash. Private capital is estimated to be a $2 trillion industry. Billions of those dollars are expected to be invested through online crowdfunding in the coming years. An estimated $204 million was raised through equity crowdfunding in 2013. The World Bank has predicted that total crowdfunding, which includes donations, equity and credit, will be a $93 billion industry by 2025.
The number of crowdfunding platforms has increased from a handful to more than 1,000 in recent years. Below are seven web-based companies that specialize in matching businesses with equity crowdfunding. Most of these companies work with a range of traditional industries and will expand their reach as crowdfunding continues to grow:
Established: 2011 in Venice, California
Crowdfunder lists more than 71,000 investors and has facilitated $107 million in equity deals. The company also has closed on more than $2 million for its own seed capital fund. Crowdfunder helps start-up entrepreneurs, but also more established companies in industries like energy, manufacturing and transportation. Companies can set up a profile on Crowdfunder.com for free. A fundraising campaign costs a minimum of $299 per month. Crowdfunder does not take a percentage of the money its clients raise.
Established: 2012 in Columbus, Ohio
Fundable reports that it has helped companies raise more than $200 million from accredited investors. The company charges a flat rate of $99 per month and offers training to help companies with their campaigns. Fundable does not collect a percentage of the money its customers raise. Companies can use Fundable to sell their products or find equity investors. Fundable has clients from sectors like energy, manufacturing, transportation, and oil and gas exploration.
Established: 2014 in New York
Onevest was created in June 2014 with the merger of equity crowdfunding platform RockThePost with start-up consulting company CoFoundersLab. Onevest aims its services toward start-up entrepreneurs who lack business connections and need help raising funds. The company reports that it has raised more than $23 million for its customers. Onevest allows “angel” investors to put as little as $1,000 into companies. Companies that work with Onevest serve industries like technology, finance and energy. Onevest's board of directors includes real estate mogul and Shark Tank regular Barbara Corcoran.
Established: 2005 in Fayetteville, Arkansas
EquityNet promotes itself as “The original and only patented crowdfunding platform,” and has helped companies raise more than $200 million in capital. Upon filling out a questionnaire on EquityNet.com, business owners are consulted on company valuation and prospects for being funded. Certain features of the website can be accessed for as little as $69 per month. EquityNet specializes in helping companies that range from the start-up stage to $100 million in annual revenue.
Established: 2012 in Atlanta
SterlingFunder provides a glimpse at the future of equity crowdfunding. It is perhaps the first online portal to allow non-accredited investors to fund companies. Because SterlingFunder is based in Georgia, it falls under that state’s exemption from the SEC rule. That means that companies that work with SterlingFunder have the option of raising as much as $1 million from non-accredited investors living in Georgia. SterlingFunder charges $850 to help companies launch a fundraising campaign, then collects between 4% and 6% of the money raised. The platform is currently hosting crowdfunding campaigns for 21 companies across a variety of industries.
Established: 2011 in Miami
EarlyShares puts client companies through a rigorous vetting process and manages about a dozen fundraising campaigns at a time. The platform represents many real estate companies but will work with other kinds of companies that show market potential.
Established: 2012 in Cambridge, Massachusetts
Wefunder reports that it has funded 109 start-up companies with more than $15 million from accredited investors. The company is backed by California start-up incubator Y Combinator and has access to more than 30,000 investors. Wefunder charges between $25 and $75 per investor transaction, and earns 10% carried interest from the companies listed on its website. The crowdfunding platform has worked with a range of innovative businesses and allows investors to commit as little as $100 in capital. Clients include a manufacturer of flying cars and a company that has developed a way to grow crops in shipping containers.
Sources: U.S. Securities and Exchange Commission, Massolution, Crowdfunder.com, Fundable.com, Onevest.com, EquityNet.com, SterlingFunder.com, EarlyShares.com, Wefunder.com, The New York Times, Denver Business Journal