In the US, 514,000 new businesses launch every month adding on average 3 million jobs per year, and access to startup capital is critical to their success and longevity.
Over the past decade, the cost of starting a company has dropped exponentially, from around $2 million in the late 90’s to $5,000 or so today, made possible by the proliferation of technology, a global marketplace, and access to information. Similarly,the current economic environment encourages entrepreneurs to forgo insecure corporate careers, financial incentives capped at a fraction of historical levels, and diminishing (if not eliminated) corporate pensions. But access to startup capital has not kept up with these radical changes.
Startups in the US are ready for a change in the financing space and equity crowdfunding could potentially be one of the best things that has happen to them in the past 80 years and below is a break down on how this new resource helps both investors and entrepreneurs.
Equity crowdfunding helps investors with:
- Transparency added via social media venues
- Diversifying portfolio
- Hedging bets (instead of investing $100K in 1 startup you can invest $100K into 100 different startups)
- Gold standard with presentations
- Profile ventures use the same display method making the review process consistent
Equity crowdfunding also helps startups with:
- Streamlining the fundraising process
- Access to larger network of investors
- Guidance during fundraising
- Clear display of brand
- Legal advantage
- Possibility to vet investor
For the implemetantion of equity crowdfunding it is important to keep in mind the following timetable:
- 1933 Securities Act bans general solicitation (public advertising of an offering) for private companies
- April 4, 2012 – JOBS Act signed into law, including Titles II & III regulating investment crowdfunding
- September 23, 2013 – Title II takes effect, lifting the ban on general solicitation for private companies (Private companies can generally solicit & receive investments from accredited investors)
- October 23, 2013 – Title III will allow non-accredited investors to invest in startups, subject to limitations
In summary, startups will be able to receive investments from an exponential number of potential investors through Title III. With the ability to generally solicit – publicly advertise – their offerings (through Title II, which was implemented on September 23, 2013), businesses will be able to reap the benefits of technology and social networks to reach and engage their biggest supporters – customers, fans, and casual investors. Title III of the JOBS Act, together with Title II, breaks down many of the barriers that entrepreneurs face in raising capital, not the least of which is reaching a geographically and economically diverse audience to help fund their business en masse.
Investors will benefit by gaining access to a new asset class in which to invest, with a wide variety of deal flow for private offerings. For the first time in 80 years, non-accredited investors (99% of the population) will be able to participate in startup investment opportunities with certain limitations that contribute to investor protection.