Crowdfunding as a source of capital seems increasingly appealing to entrepreneurs, but growth has been inconsistent among the kinds of crowdfunding platforms that exist, experts say.
Equity crowdfunding has yet to gain traction, according to Ethan Mollick, a professor of management at the Wharton School, but he thinks some of the most interesting changes are occurring in that specific subset of crowdfunding. Equity crowdfunding offers an alternative to traditional ways of raising equity, allowing investors to purchase securities in companies through online portals, sometimes for as little as $100 and without being accredited.
The U.S. Small Business Administration defined the three basic types of crowdfunding in a 2015 report. Reward crowdfunding means money is exchanged for a clearly defined good, but in equity crowdfunding, money is exchanged for a piece of the venture. The third subset, peer-to-peer crowdfunding, occurs when money is exchanged for a loan agreement.
The Jumpstart Our Business Startups Act put equity crowdfunding on the map. In 2012, Title III of the JOBS Act put in place crowdfunding provisions that let early-stage companies offer and sell securities. The Securities and Exchange Commission then adopted Regulation Crowdfunding to implement the JOBS Act’s crowdfunding provisions, which apply to equity crowdfunding. The Financial Industry Regulatory Authority, for its part, says its role is to oversee the registration of crowdfunding portals and monitor their compliance with federal securities laws and FINRA rules. FINRA currently lists 29 SEC-registered crowdfunding intermediaries that it regulates.