There are four types of Crowdfunding.
- Donation based – people make donations based on the good feeling of helping others.. Indiegogo is a very popular site to raise funds for movies, write books, pay off student loans and a number of worthy causes.
- Rewards Based – Investors receive anywhere from just a thank you note to a brand new product. Kickstarter is normally the site people think of for this type of crowdfunding.
- Lending Based – Usually a few thousand dollars and a favorable alternative to banks. Prosper is a site where people can invest or borrow personal loans at competitive rates.
- Equity Based – Individuals invest their money in exchange for ownership. Early Shares is a great site for information on Equity based crowdfunding.
The first three are quite prevalent but Equity Based portals can’t start selling equity direct to the public yet.
The JOBS Act of 2012 made major changes to our securities laws that have been in effect for 80 years such that transactions of $1 million or less involving the offer of sale through a broker or funding portal are exempt from certain registration requirements and prohibitions related to interstate commerce.
Although the law has been passed before we begin the SEC must promulgate the rules of engagement. Congress mandated that this be completed by the end of 2012 but has not happened yet. Many expect that by the end of the year we’ll be ready to go.
The JOBS Act defines “funding portal” as any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others.
A Funding Portal Does Not:
- Offer investment advice or recommendations.
- Solicit purchases, sales or offers to buy the securities offered or displayed
- Compensate others for solicitation
- Hold or manage investor funds
- Engage of other activities determined by the SEC
For entrepreneurs, if you’ve got a great idea you will soon be able to create a video to put up on one of the portals and raise up to $1 Million per year direct to the public.
For small investors, you will soon be able to go to one of these sites and look for great ideas to invest in. Who knows, you may find the next Instagram.