As technology advances, more people have access to investment opportunities than ever before. Just about anyone with $25 and an internet connection can open a brokerage account and start trading on the stock market. The next evolution in investing could very well be “securities crowdfunding,” in which ordinary people have opportunities to invest in small businesses and startups with greater ease.
“There are expectations that at some point in 2014, securities crowdfunding will become legal for all investors,” says Chris Tyrrell, the CEO of crowdfunding platform OfferBoard. He’s referring to a law passed not too long ago that allows for securities crowdfunding.
Right now, businesses looking to leverage social fundraising for their businesses use sites like Kickstarter and Indiegogo. However, this isn’t investing. Those who contribute to such campaigns receive no ownership in the business and are issued no stock. Instead, they’re offered “thank you” gifts and perks.
What Is Securities Crowdfunding?
Securities crowdfunding would be different. Businesses could use this model to raise money and offer investors ownership in the company. In fact, certain investors already have access to this type of investment.
“Title II of this legislation deals with accredited crowdfunding, and became legal on September 23, 2013,” Tyrrell explains. “Accredited investors are those with more than $1 million in net worth or an individual income of $200,000 per year.”
Right now, these investors are the only ones who can take advantage of the new crowdfunding rules. But for them, it provides opportunities that were previously only available to venture capitalists and angel investors. According to Tyrrell, “Crowdfunding platforms like OfferBoard offer investors the ability to find middle market companies that are growing, commercializing, and recapitalizing.”
The next stage of the crowdfunding law, though, would include everyone. “The Title III section of the law is still in review,” says Tyrrell. “It will be in comment period until February 3, 2014, but there seems to be an interest in getting it approved quickly.”
Title III crowdfunding will be aimed more at helping startups and other early-stage businesses. These businesses will be able to raise funding through small investments from individuals, and they can raise up to $1 million this way. “And anyone can invest,” Tyrrell says. “It’s not just for accredited investors. Anybody can invest in a startup and take the chance of seeing a good return.” Whilst investing previously had an aura of exclusivity about it, it is now for the masses. Fortunately, investors feel more protected also due to the existence of companies set up to assist with class action securities.
Of course, turning everyone into a venture capitalist comes with risks. This is part of the reason that the wider provisions of the crowdfunding bill are delayed — compared to those offered to accredited investors. “Regular” investors are less able to absorb the risk that comes with investing in early-stage companies.
How You Can Get Involved
For investors looking to diversify a little bit by investing in small business, however, the new crowdfunding rules could come as a boon. As long as you complete your due diligence, and focus on solid companies with good business plans, you could expand your portfolio to include these types of publicly offered private securities.
Securities crowdfunding is also likely to help businesses. “Now you can go advertise to a wider base,” says Tyrrell. “You have broader network access, and this can help early-stage companies raise money early on.”
What do you think? Would you participate in securities crowdfunding?
About the Author
This article was written by Miranda Marquit and originally appeared on moneyning.com. Moneyning.com is a personal finance blog where insights are shared on how to carefully save money, invest for the future, and live frugally and happily – because it’s the little things that matter in achieving financial freedom.