If you’re a tech enthusiast interested in options for supporting startups, you might be trying to discern the difference between Kickstarter or Indiegogo and equity crowdfunding. Traditional equity crowdfunding sites facilitate the ability for “backers” to donate money to campaigns in exchange for perks, like sample products or tee shirts. Platforms using Regulation CF facilitate the sale of a form of equity in private companies to investors.Traditional Crowdfunding
Indiegogo, the first crowdfunding site, launched in January 2008 with the belief that anyone with a passion for changing the world should have access to the resources to make the vision a reality. About a year later Kickstarter opened up its platform, and declared its mission to bring creative projects to fruition. Success would be measured by the positive impact on society rather than profits. However, Kickstarter was bound to give rise to one of the biggest Unicorns, Oculus.
In 2014, the virtual reality company, Oculus, notoriously sold to Facebook for $2 billion after having one of the most successful Kickstarter campaigns ever. Even though it’s unlikely Facebook would have made such an offer if Oculus’s crowdfunding campaign wasn’t so popular, none of the donors would benefit from the company’s success.
It’s important to note Oculus and Facebook didn’t break any rules. At the time, the SEC only allowed accredited investors to invest in startups, so it was illegal for companies to offer equity to the crowd. Title III of the JOBS Act would eventually give everyone, not just venture capitalists, the opportunity to invest in startups.
On May 16, Regulation Crowdfunding (Title III of the JOBS Act) finally went into effect, permitting startups seeking capital the opportunity to solicit investments from crowd investors. Now, innovative companies developing technology, designing products, or creating artisanal foods can validate their ideas through the momentum of a crowdfunding campaign and allow evangelists to become shareholders.
Before Reg CF, Oculus had no way to raise money from its community members and give them a stake in the company. Ouya, TT Design Labs, BlueSmart, and Tile are among a number of other companies that had successful crowdfunding campaigns and later raised institutional capital in traditional rounds or were acquired. Again, none of the participants in the crowdfunding campaigns could share in these companies’ monetary successes.
The only tangible similarities between traditional and equity funding are the opportunity for backers/investors to help empower innovation, and for companies to grow larger communities around their businesses. While backing a traditional crowdfunding campaign is a one time transaction, investing via equity crowdfunding is an equity purchase in which investors become shareholders and must use SEC approved platforms like FlashFunders.
Even though there is no guarantee startups that choose Reg CF will be successful, owning shares in early stage companies has the potential to be profitable. When a company raises capital in later rounds at a higher valuation, early investors may benefit as the value of their stock rises. If the company is acquired or enters the public market, the investment becomes liquid and shareholders can most likely cash out their stock options. All investments carry a certain level of risk, so investors should diversify their portfolios. Riskier investments can yield high returns over a short time period, but should make up a smaller percentage of investors’ portfolios.
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