Crowdfunding – The Fastest Growing and Most Unusual Source of Startup Funding

America’s first major crowdfunding project was the Statue of Liberty.

The Internet has led to life-changing trends including exhaustive knowledge bases, social networking, and revolutions in e-commerce. Yet, one industry has been slow to experience, if you will, Internetization.

Due to its high-securitized and regulated nature, the financial industry has been laggard in embracing the speed and convenience of digital technology.

But in the last five years, we have seen an intentional shift towards technological adoptions such as mobile banking apps. A new report from the U.S. Federal Reserve says the use of mobile phones to access accounts, credit cards and other financial transactions is now commonplace among U.S. consumers.

However, one segment of the financial industry remains at the cusp of disruption, which we are only beginning to experience today: venture capital, early-stage investment capital, and startup funding.

These segments of the financial industry have yet to undergo significant innovation.

Today, the typical investment scenario involves a handful of multi-millionaires coalescing their funds, under the leadership of a lead investor and with plenty of attorney guidance and due diligence to invest in a private equity deal. This operation is governed by the United States Securities and Exchange Commission (SEC), which permits only accredited investors to purchase private placement securities.

In 2013, the U.S. government legislated the Jumpstart Our Business Startups (JOBS) Act, a bill that lifted the tight regulations regarding capital investment. In Title III of the JOBS Act, a framework was laid for crowdfunding as a cost-effective source of capital.

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.

According to the 2015 Massolution Crowdfunding Industry Report , crowdfunding is expected to raise $34.44 billion by this year’s end across six major categories:

  1. Donation $2.85b
  2. Reward $2.68b
  3. Lending $25.1b
  4. Equity $2.56b
  5. Royalty $405m
  6. Hybrid $811m

Crowdfunding is not a new concept by any means.

America’s first major crowdfunding project was the Statue of Liberty. Popular crowdfunding platforms such as KickStarter and Indiegogo, which allow product makers and artists to raise capital online from anyone in return for special privileges and rewards such as early access or insider information to a product’s development, are examples of reward crowdfunding.

But what is really interesting is the emergence of equity crowdfunding in September of 2013. While it has remained limited to accredited investors, until recently, equity crowdfunding is an investment vehicle where companies (i.e., startups, real estate companies, etc.) can raise capital by trading ownership shares. Instead of just a handful of partners taking large chunks of ownership, now hundreds of investors can buy shares of equity for amounts as little as $5,000.

With only 3% of Americans being accredited investors, it doesn’t seem like equity crowdfunding will make too big of a splash in the venture/angel capital investment pool. But Chance Barnett, CEO of Crowdfunder.com, thinks otherwise. He said:

If equity crowdfunding doubles every year like the rest of crowdfunding has, then it could reach $36 billion by 2020 and surpass venture capital as the leading source of startup funding.

However, Venture capital just had its most outstanding year ever, accounting for billion of investment in 2014, according to the MoneyTree Report.

Regardless, many companies have continued to gear up for the SEC’s adaptation of final rules on equity crowdfunding.    These rules were finally adapted by the SEC as announced on Friday, October 30, 2015.  This article, in The National Law Review, provides details related to the final rules.

One company, Fundrise, is a startup that claims it will take $14 trillion away from Wall Street. Based in Washington, DC, Fundrise is the nation’s first and largest real estate investment crowdfunding platform, initially seeking to provide anybody with the opportunity to invest in real estate.

Ben Miller, CEO at Fundrise, has said it is only a matter of time before equity crowdfunding is released to the other 97% of America. As a result, his company has been gearing up for international growth and setting the groundwork for the flood of non-accredited investors when the SEC lifts the red tape.  With the recent announcement by the SEC adopting the final rules, Fundrise will be well positioned for the transformation in this segment of the industry.

The financial industry has been slow to embrace digital expediency but thanks to the JOBS Act, and recent adaptation of the final rules by the SEC, equity crowdfunding is now a normal piece of the average investor’s portfolio.

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Dave Schools

Dave Schools is a writer. When he’s not working as director of marketing at Mitch Cox Companies, he writes about startups, tech, and design for Business Insider, The Next Web, Quartz, and Smashing Magazine. He earned a degree in Entrepreneurship from Grove City College, founded Efographic, and is working on two mobile apps: Brew and City Swipe. Say hi to him on Twitter.