You’ve probably heard the term “crowdfunding” before, likely in the context of a Kickstarter campaign or a GoFundMe page. At the most general level, crowdfunding refers to a financing model in which small sums of money are collected from a large pool of people (the crowd).
Equity crowdfunding uses this same model, but instead of offering products or perks, funders receive a percentage of ownership, a financial stake in the company, or the right to future revenues or crypto-assets with an aim to earn a return.
There are essentially three kinds of crowdfunding: reward-based,
donation-based and equity-based.
Is when you contribute money and get a reward or product in return. This is mostly used for creative campaigns, and there are often different levels of rewards, or perks, that correspond to pledge amounts. Think Kickstarter and Indiegogo.
Is when a funder contributes to a campaign without expecting any perks or value in return. This is mostly used to fund charitable causes, like funding to build a wall in Kenya, or personal expenses, like helping pay a friend’s medical bills. Think GoFundMe, YouCaring and CrowdRise.
Which includes accredited crowdfunding and open-access regulated crowdfunding.
Learn more about what is crowdfunding and how does it work
In the past, only accredited investors could invest in private companies. In theory, this was to protect everyday citizens from investing more than they could afford to lose, but this also meant that the majority of Americans were denied the opportunity to invest in startups at all.
In 2012, after signing the bipartisan act into law, President Obama declared:
For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.— Barack Obama
The change finally occurred in May 2016, when the U.S. Securities and Exchange Commission enacted Title III of the JOBS Act, often referred to as “Regulation Crowdfunding,” or “Reg CF” for short. Under Title III, the majority of the population could invest in startups for the very first time.
The rules stated that 1) entrepreneurs can now raise up to $1 million in a 12-month period from non-accredited investors, and 2) investors can invest a limited amount per 12-month period based on their income and net worth.
The rules stated that 1) entrepreneurs could raise up to $1.07 million in a 12-month period from anyone (non-accredited investors included), and 2) that everyone over 18-years of age would be eligible to invest up to a certain amount, depending on their annual income and net worth (companies can invest to, with their limits determined by their net revenue and net assets). The one unique feature of the rules: these investments can only be done through funding portals. Enter Republic!
Because more investors means more startups, and more startups means more innovation and progress.
This is what it looks like to fund the future. Read more about our mission here.
We’re a community of over 200,000 people interested in startups, investing, and building a more entrepreneurial society.
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