Types of Investors

Crowdsourcing and crowdfunding

In the context of financing, crowdsourcing is the process of getting funding, usually online, for a project from a large number (or crowd) of people who typically each contribute small dollar amounts. With crowdsourcing platforms (such as Kickstarter), the entrepreneur will set a target for the dollar amount to be raised, the deadline by which it must be raised and any reward to the persons contributing to the project. Typically, the dollar amount to be raised must reach the targeted amount on or prior to the deadline or all funds raised must be returned to the people who contributed to the project. Crowdsourcing does not involve the issuance of shares of stock, convertible notes or other securities to those persons who contribute. Instead, they typically receive a copy of the product that their contribution helped fund or some other token of appreciation rather than a stake in the company.

, such as proposed under the , is different than crowdsourcing. In crowdfunding, many investors are connected—usually through the Internet—and pool their money to purchase securities of a company. Some online networks, such as AngelList, only connect entrepreneurs and companies with . In 2012, Congress passed the JOBS Act, which includes provisions that are intended to allow individuals that are not accredited investorsto invest in securities through crowdfunding. Crowdfundingunder the JOBS Act is not yet the law in the United States, because the Securities and Commission has not finalized the crowdfunding rules. When those rules are completed, it is expected that a company would be able to raise up to $1 million in any 12-month period from investors even if they are not accredited investors. While crowdfunding under the JOBS Act may open up new opportunities for certain types of companies to raise capital, there will be a number of additional restrictions on the amount of investment from each individual investor, as well as a number of additional requirements—such as the need to provide financial statements and, in some cases, tax returns—that are likely to limit the feasibility of crowdfunding for high growth companies.