Kickstarter is crowdfunding with training wheels. Now the sourcing of capital is getting turbocharged with equity crowdfunding for businesses: the Securities and Exchange Commission's newly authorized and democratized angel investing program.
Who can invest?
For now, the table stakes are not penny ante: you’ve got to be an accredited investor, meaning you're flush with a $200,000 annual income or a net worth of a million bucks. But once you're at the table, an easy minimum, usually around $5,000, can allow you to buy in to exotic startups in virtually any field. A flying car is one notable example. There are many others, like organic Icelandic yogurt and wine on tap.
Soon, perhaps before the end of this summer — though additional delays wouldn't be a surprise, the SEC will throw open the doors to "Title III" (PDF) equity crowdfunding, allowing the average investor a seat at the table. That’s when the real fun will begin.
The process of New Age angel investing will involve three parties:
- The issuer — The guys in the garage. They've got a business idea — maybe it's the next Twitter or Amazon — and they need capital to build-out prototypes or programming. Or, perhaps for marketing or manpower. They will need to produce an offering document and financial statements in order to raise a maximum of $1 million within a 12-month period.
- Funding portals — Think of these intermediaries as being similar to the broker-dealer of the traditional stock world. They will list the offerings, promote the promise of the product or service. and sell the equity shares. This will be, for the most part, an online transaction — and there are expected to be numerous players. Some platforms have already launched, with offerings targeted strictly to accredited investors until the SEC waves the green flag for the masses.
- Investors — That's you and me. Investors will be able to get a share of their favorite startup for as little as $50 to $100. There is quite a bit of handwringing in the media that enthusiastic Grandmas and Grandpas will be betting the subsidized farm — and nextgen's inheritance — on a startup manufacturing 1.21 gigawatt flux capacitors. It won't be that bad. The SEC has issued rules that investors with an annual income or a net worth below $100,000 can only invest up to $2,000 or 5% of their annual income or net worth, whichever is higher. Investors over that income/net worth watermark can put up to 10% stake, no more. So it can't be nearly as bad as what Grams and Gramps lost on the Munder NetNet fund back in the early '00s.
Where to invest
Fundable, Circleup, Crowdfunder and many other equity portals are available to accredited investors right now. When the gates open to the rest of us, expect many more providers to stake a claim in the equity crowdfunding online land-grab.
Each funding portal will have to pass muster by registering with the SEC, so your neighbor's teenage son likely won't be able to get in the game.
It's expected that much of the essential due diligence information required to be provided to potential investors will be standardized and presented in a uniform manner from one funding portal to the next. That will make the selection of which platform you prefer to use to be mostly a matter of the equity offerings.
If you're looking for a real estate deal, or the company that has developed the "Open Table" of hair stylists, you'll have to browse the markets to find the early-stage venture you're looking for.
And hope the guys in the garage hit a home run.
Hal M. Bundrick is a Certified Financial Planner™ and former financial adviser and senior investment specialist for Wall Street firms. He writes about retirement accounts and personal finance for NerdWallet. Follow him on Twitter: @HalMBundrick.
Photo courtesy of Shutterstock.