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Hello everybody, how are you doing this wonderful Friday afternoon?
It’s a good day to be alive. For those of you who don’t know, my wife is likely having our first child this coming Monday, and saying that I’m ecstatic right now is an understatement.
Exciting stuff all around, other than like everything nuts that’s happening around the world… Again.
Alas, we’re not here to discuss that.
Today, I’d like to dive into Crowdfunding and clear up any confusion that still exists to the limits and ins and out of this ever growing form of investing.
Let’s get to it!
Crowdfunding Basics
Crowdfunding is basically a way for Start-ups and entreprenuers to secure capital for their various ventures from a large group of people without the typical process of SEC registration.
Our friends over at Investopedia define it as…
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists.
Crowdfunding, or Reg CF, truly makes it possible for non-accredited investors to get in on the action with up and coming companies, that would typically be entirely off limits due to rigorous SEC restrictions.
Since its creation as part of the JOBS act in 2012 under the Obama administration, Crowdfunding has been a roaring success.
In 2015 the Crowdfunding industry raised about $16.2B and is projected to increase that number exponentially with new SEC legislation that came out this year. More on that in a minute.
There are essentially FOUR different way that people use Crowdfunding currenlty.
Debt Crowdfunding
This is where contributors, or investors, are incentivized through interest payments on the capital they give.
Equity Crowdfunding
This is where contributors, or investors, receive shares in exchange for their contributions.
Rewards Crowdfunding
This is where contributors, or investors, are promised rewards once it goes live; eg. priority access.
Donation Crowdfunding
This is where contributors, or investors, give their money for a charitable cause. These donations are typically tax deductible.
Check out this extremely helpful video for more information.
Crowdfunding Regulations
When Crowdfunding first began there was a limit to any give campaign of of just over $1M, $1.07M to be exact, within a years timespan.
There is also a limit as to how much a non-accredited investor could donate to any give campaign.
However, just earlier this year the SEC altered prior legislation to make Reg CF an even more lucrative and practical option for companies and investors alike.
As of 2021 the limit of capital per crowdfunding campaign is at $5M, 5x as much as what it had been previously. (Fairly obvious observation there with the 5x, but I thought it should be included haha)
There are new rules as to how much you cash an individual can deploy depending on your investment classification.
For accredited investors, there is no limit, allowing them to bite off as much of the apple as they’d like up to the $5M cap.
For non-accredited investors the restrictions for donations are the greater of: $2,200 or 5% of the lesser of the investor’s annual income or net worth.
Though restrictive, these limitations serve to protect both the businesses and non-accredited investors that choose to utilize the unique Reg CF system.
Conclusion
Crowdfunding is a unique and innovative way that has greatly expanded the investor playing field.
All trends would indicate that it has served its purpose in encouraging entrepreneurship and innovation.
It has also facilitated the inclusion of lower net-worth individuals into the VC space, and I predict a significantly increased usage of this investment vehicle moving forward, especially with the new $5M cap.
Hope this was helpful,
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
