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Crowdfunding: "Why Seek Accredited Investors?"

by Scott Casson | May 28, 2014

Crowdfunding—Well, if you haven’t heard of it by now, this article should bring you up to speed and explain why your next crowdfunding marketing campaign will need to target “Accredited Investors.”

Crowdfunding at a Glance:

Still considered a relatively new industry, crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” [1] In 2011, with the passing of the American Jumpstart Our Business Startups [JOBS] Act, the industry went through quite the aggressive boom.











Due to the American JOBS Act’s lessening of general solicitation restrictions [Rule 506(c)], the US market experienced a heavy “investor rush” significantly boosting the overall global crowdfunding volume.

The correlation between volume growth and passing of the JOBS Act is just too strong not to address. As we can see, America took this Bull Market by the horns.

The Big Four Crowdfunding Platforms:

When we look at crowdfunding platforms [CFPs], we are dealing with one of four types—this distribution of different platforms is the industry standard:

1. Equity-Based
2. Crowd-lending/Credit-Based
3. Reward-Based
4. Donation-Based

While Reward-Based crowdfunding is currently the largest CFP, Equity-Based CFPs are most likely to generate the largest amounts of capital and are observed as the fastest growing platform of the four. [2]

Once the American JOBS Act passed, eager crowdfunding participants pushed into this new market before the Securities and Exchange Commission [SEC] could even push regulative legislation out. In an effort to somewhat speed up the regulatory process, crowdfunding supporters [CFP leaders and experts] banded together in 2011 to form CfIRA [CrowdFund Intermediary Regulatory Advocates]. [3]

As with all new markets—startups or new economies—both the startup and investor just need to be conscious of the potential outcomes [having to the ability to take the good with the bad].



(Thank You Satitista! For more quality Infographcis, charts, statistics and studies from over 18,000 source please visit http://www.statista.com/chartoftheday/)

Setting Your Mind At Ease & Why You Should Invest

Crowdfunding, done right, produces many benefits that come with this market.

Crowdfunding acknowledges the stratification of business sizes in the marketplace [namely America]—with over half of the nation’s jobs coming from small business, many opportunities for growth [and job generation] come with this broadening of investor access [via the JOBS Act].

The direct transactional relationship between investor [both large/small] and startup restores the humanity to business practices. Given the typical large pool of investors, the relationships foster a community of informed and committed stakeholders. [4]

It’s not an entire free-for all; though minimal, there are regulations that call for ethical practices. CFPs must register with the SEC and are required to publicly disclose information—keep an open book, if you will. Also, investors are expected to keep their securities in the startup for at least a year—No Pump and Dump Scheme. [4]

Why Crowdfunding Needs Accredited Investors

Now with a general understanding of crowdfunding we should turn our focus to accredited investors in crowdfunding.

Strictly speaking Equity-Based crowdfunding, currently, is open exclusively to accredited investors. To reiterate, until Title III of the JOBS Act is passed by the SEC, the only parties permitted to deal in Equity-Based crowdfunding [domestically] are accredited investors. Moreover, as of now, only three of the four CFPs are open to virtually everyone. This is likely to change [for the better], come the next few months, as the SEC has closed its comment period; expect another market rush when non-accredited investors are permitted access to Equity-Based CFPs. [5]

Truth is, accredited investors can take bigger hits if a company goes south without breaking the bank—with this, their immediate assumed loss will not [likely] cause a kneejerk withdrawal from the crowdfunding industry [unlike non-accredited investors].

Potentially successful startups can quickly receive the necessary seed capital—as opposed to a long drawn out fundraising campaign or waiting on a bank loan that is never getting approved. This is absolutely vital to positive economic growth on the macro level—no invested capital means no money, and no money means no business. [6] Also, accredited investors will naturally aid in the weeding out of destined-to-fail startups; this weeding out will naturally drive up market quality and support economic growth. [4]

Large investments from accredited investors will lead to perceived startup confidence; which, in turn, would likely increase investment from both non-accredited investors and accredited investors. Everyone wants a piece of the next Facebook, Google, or Apple!

Closing Thoughts

Is crowdfunding risky? Can be, but what initial business investment or start up isn’t? The crowdfunding industry is booming—the charts don’t lie; international regulatory legislation is minimal, and recent SEC developments suggest only beneficial regulatory legislation to come [with growth in the equity-based crowdfunding industry]. Additionally, this crowdfunding craze has not only opened the door to non-accredited investors, but to any and all types of entrepreneurs; such a move has diversified the market creating a recipe for innovative market progress. It’s the Wild West, time to saddle up and stake your claim.

Sources & References:

Satitista: For more quality Infographcis, charts, statistics and studies from over 18,000 source please visit http://www.statista.com/chartoftheday/)

1. Crowdfunding and Economic Benefits—Forbes—http://www.forbes.com/sites/tanyaprive/2012/11/27/what-is-crowdfunding-and-how-does-it-benefit-the-economy/
2. Massolution. (May, 2012). Crowdfunding Industry Report: Market Trends, Composition and Crowdfunding Platforms. http://www.crowdfunding.nl/wp-content/uploads/2012/05/92834651-Massolution-abridged-Crowd-Funding-Industry-Report1.pdf
3. CfIRA—http://www.cfira.org/?page_id=17
4. http://www.startupexemption.com/crowdfunding-101#axzz32SnTHCt6
5. Crowe, Byron. (2014). Title III of JOBS Act. http://cornellsun.com/blog/2014/03/21/barely-legal-entrepreneurs-and-investors-get-stoked-title-iii-is-coming/
6. Crowdfunding with Accredited Investors—Forbes—http://www.forbes.com/sites/chancebarnett/2012/08/30/first-s-e-c-rulings-launch-crowdfunding-with-accrediteds/

• Crowdfunding Blog—http://crowdfundinglaw.wordpress.com/
• Crowdfunding Wiki http://en.wikipedia.org/wiki/Crowdfunding
• Global Crowdfunding Volumes—Chart—http://cleanvisionnetworks.com/wp-content/uploads/2013/12/normal-ChartOfTheDay_1034_Funds_raised_through_crowdfunding_in_2012_n.jpg
• http://www.forbes.com/sites/chancebarnett/2013/10/23/sec-jobs-act-title-iii-investment-being-democratized-moving-online/


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