The Difference between General Solicitation Crowdfunding & Crowdfunding
With most crowdfunding, funders can “donate” monies to a startup or going business concern that is raising capital. Critically, however, they won’t get a stake in that company in exchange. As a result, those funders are “technically” not “investors” and technically not governed by federal and state securities laws.
The JOBS ACT’s goal (among others) was to usher in a new era where everyone, including non-accredited investors could finance a company online. In other words, the goal is for the Kickstarters and Indiegogo’s of the world to permit funders to be “investors”, in that those people would receive equity stakes in a company they finance.
“Reg-D” Crowdfunding
However, the practical reality is that currently only licensed broker-dealers per the Financial Industry Regulatory Authority (“FINRA”), who are regulated by both the SEC and FINRA, are the ones facilitating online investments. Critically however, these situations only involve accredited investors–as defined by the SEC–and only they can use these online portals to invest.
Hence a special niche form of equity crowdfunding, which is often referred to as “Reg-D Crowdfunding” is effectively filling the void in the online investor space.
A sampling of the sites and platforms providing this type of crowdfunding include: AngelList (in conjunction with SecondMarket); Microventures; FundersClub; CircleUp ; and Fundroom.
As is often the case, Reg-D crowdfunding pools monies of accredited investors towards a seed or Series A round of a startup or early-stage company. In addition, the investment vehicles come in the form of equity and debt (e.g., convertible notes) like your off-line startup or early-stage rounds. However, unlike rewards based crowdfunding, because the investors are brought in under regulation D, they are entitled to receive an equity stake in the target company.
Certainly, even when a real player in the true Jobs Act equity crowdfunding space emerges, Reg D crowdfunding is sure to continue in popularity. That is because the practical headaches associated with crowdfunding make it a less desirable means for raising capital in connection with companies anticipating multiple rounds that require more than $1 million. In those instances, access to accredited investor monies is still likely the best bet.
