I go inside the crowdfunding revolution for startups & investors
A radical transformation has been taking place over the last year – forever redefining what it means to be an investor in America, and bringing investing into the Internet Age.
A key part of this transformation focuses on closing the gap in securities law between two types of investors: accredited and non-accredited. A non-accredited investor is currently defined as anyone who makes less than $200,000 per year, or has less than $1,000,000 in the bank. Anyone over that benchmark is deemed “accredited,” which means they’re graced with investment opportunities that aren’t available to the rest of the population.
The only distinction between these two groups is personal wealth. Not enough Americans know about this distinction or what it really means. Here are two important implications:
1) If you’re non-accredited (not a wealthy person), it’s illegal for you to be presented with investment offerings in private businesses unless you already know the founder.
2) If you’re trying to raise money for your company, it’s illegal for you to publicly broadcast that fact in an effort to attract investors. You can’t use your social network to find investors. If you don’t already know investors, which most Americans don’t, then good luck.
In short, our securities laws leave about 80% of Americans (non-accrediteds) standing on the sidelines in the wealth creation cycle of early-stage investing, while wealthy Americans enjoy exclusive access to participate.
It was 1933 when the first of these laws were created to protect vulnerable Americans from losing what little money they still had in the aftermath of 1929.
But the world has changed dramatically since then. Giving Americans equal economic opportunities based on their wealth or income isn’t just a political imperative. It’s a moral imperative.
Legalizing crowdfunding for accredited investors is the first in a series of securities-law changes to roll out during the S.E.C.’s 270-day ruling period. With crowdfunding for accrediteds about to go live, it’s my guess that rules for non-accredited investors will face a bigger regulatory hurdle and louder opposition.
Those who oppose crowdfunding laws under the JOBS Act would have you believe that non-accredited investors can’t be trusted to make their own financial decisions and thus shouldn’t have the opportunity to invest in private companies.
They argue that ordinary Americans are naïve and don’t have adequate experience to be allowed to invest.
What crowdfunding opponents conveniently overlook is that ordinary Americans have a history of investing in private companies with whom they have a personal connection, and are allowed to do so under current law at a rate of up to 35 non-accredited investors per company.
If you know anything about investing in small businesses, you know the decision to invest is as much about the people in whom you’re investing as it is about the idea.
Yet opponents talk about crowdfunding in a vacuum, as though it’s about some cold and impersonal “stock market.”
Under the JOBS Act, changes in securities laws will create a new market for business crowdfunding that gives everyone – regardless of income or net worth – the opportunity to invest in early-stage startups and small businesses.
And while bringing accredited investor deals online is a great step, it’s not the full realization of what business crowdfunding aims to achieve.
What I predict will be the most socially transformative part of crowdfunding will come from the power of local or community-based investing.
Here’s how community-based crowdfunding works…
Imagine that you know a talented, ambitious chef who wants to open a new restaurant in your neighborhood. Unfortunately, she doesn’t know any wealthy investors and doesn’t have many wealthy friends. It’s unlikely that she’ll raise the money she needs.
Cut to community-based crowdfunding – the same chef might not know wealthy investors, but she does have a large community of colleagues, friends and family, and an extended social network of people who like and respect her.
With her business and financial plan in hand, she goes on a crowdfunding platform like crowdfunder and puts her investment offering out to her network and her local community.
Within a few weeks, she has raised the first 20% of the funding she needs. With the initial funding she received, and the people who put up the money, a strong social signal is created for others that this is an interesting opportunity worth exploring … when those people follow on, her restaurant has all the funding it needs.
Not only does investing in local businesses appeal to this new class of non-accredited investors, it can and will often take place within existing relationships and communities of people who know, respect and trust one another. The outcome? Stronger communities and stronger local economies.
I believe that crowdfunding has a higher evolution beyond random offerings on the Web – one that is all about connecting real people in real communities, where trust and reputation are front and center in the process.
Investing in your community and people you know is the “killer app” for crowdfund investing in the U.S., and it’s an idea whose time has come.
Will you be part of this revolution in finance? Will you strengthen your local economy by looking into nearby small business investment opportunities?
So get engaged in your community: join a platform, play a role and be part of this unique time in history.