Types of Investors

Crowdfunding


In the context of financing, is the process of getting funding, usually online, for a project from a large number (the “crowd”) of people who typically each contribute small dollar amounts. With crowdfunding 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. Contributors in this type of crowdfunding offering typically receive a reward—a copy of the product that their contribution helped fund or some other token of appreciation. They do not receive any ownership interest in the company in the form of shares of stock, convertible notes or other securities.

In securities-based crowdfunding, on the other hand, those who contribute funds receive equity or another security in exchange for their “contribution.” In securities-based crowdfunding, many investors are connected—usually through the internet—to purchase securities of a company. These types of transactions are subject to the US federal securities laws. Some online networks, such as AngelList, only connect entrepreneurs and companies with . In 2012, the was enacted in an effort to simplify capital formation. It included provisions intended to allow individuals that are not accredited investors to invest in securities through crowdfunding.

Under Regulation Crowdfunding, which was adopted under the JOBS Act, a company is currently able to raise up to $5 million in any 12-month period from investors, even if they are not accredited investors. Although Regulation Crowdfunding has the potential to open up new opportunities for certain types of companies to raise capital through , the provisions also include restrictions (e.g., offering-size limits, investor investment limits) and impose requirements (e.g., the need to provide financial statements and, in some cases, tax returns) that are likely to limit the feasibility and appeal of crowdfunding for high-growth companies.