Startup founders will have another tool for raising early stage capital starting next month. On May 16, the SEC is allowing companies to use crowdfunding to raise money.
After much talk about the coming changes to equity crowdfunding since they were passed last year, it’s actually happening. Raising money via the web has been possible since the JOBS Act was passed in 2012, but the new regulations under Title III of the federal law open it up to people who don’t necessarily identify as investors.
“What’s changing is that nonaccredited investors can now participate and buy equity in companies,” said Alex Castelli of CohnReznick. In other words, you don’t have to be a millionaire to make an early bet on a startup.
Along with CohnReznick senior manager Steve Schwartz, Castelli will be breaking down equity crowdfunding at the latest session of Camp Inc. on Tuesday, April 12. The event is set for 4 p.m. at the Emerging Technology Centers’ Haven campus.
The new rules open up the possibility of more potential investors, which could lead to more early stage capital.
Crowdfunding may bring Kickstarter to mind, but it’s not that easy of a comparison. For one thing, it’s not clear yet where equity crowdfunding will be offered. Our sister site Technical.ly Delaware reported last week that Kickstarter likely won’t offer it, and Indiegogo is a maybe. Last year, OurCrowd CEO Jon Medved talked about wanting more Maryland startups involved in that platform, but at that point OurCrowd was still “Kickstarter for millionaires.”
Additionally, Schwartz and Castelli point out that the equity crowdfunding process will be regulated, with the SEC documents and other facets that go with raising money. Since it requires that extra work, they encourage startups to think of it as a piece of a long-term fundraising plan. After all, it still involves giving up a piece of the company.
“You have to be prepared that there are people out there than own your stock that you don’t know,” Castelli said.
Schwartz pointed to potential for B2C startups to create market buzz. With a successful equity crowdfunding campaign, a founder could “go to an angel or go to a VC and say, ‘Hey, I got all this market hype,'” he said. Remember, crowdfunding is really about marketing.
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