Sites like Kickstarter and Indiegogo have long allowed individuals to support start-ups in exchange for pre-buying a ticket or early prototype of a product, but not for equity. Accredited investors—with a net worth of over $1 million or who earn over $200,000 a year—have their own platforms and can invest in companies through sites like AngelList.
However, new rules enacted last May allow average people to invest in start-ups through crowdfunding sites that reward investors with equity. The rules usher in a new era of crowdfunding that is accessible to individuals of all economic backgrounds.
As part of the federal JOBS Act,Title III rules allow everyday investors the opportunity to share in the returns of the “next big idea.” This week, (Monday, July 18) for example, a new equity crowdfunding site, Republic, launched with a curated set of projects and companies that include women-founded startups such as Farm from a Box and minority-owned companies like Youngry.
MIT Sloan Assistant Professor Christian Catalini has targeted his research on the economics of innovation, entrepreneurial finance and crowdfunding. Catalini is part of an elite few academicians who are analyzing the emergent investment crowdfunding space, so when he shares his findings, and associated perspective, it is worth paying attention.
Catalini, along with his co-authors, Ajay Agrawal and Avi Goldfarb at the University of Toronto, have labeled syndicates the “killer app of equity crowdfunding”.
There has been much discussion and debate if it is the wisdom of the crowd or herd mentality that reigns in investment crowdfunding, but according to Catalini a hybrid mix of professional insight, alongside the crowd, is easily the best.
In their working paper entitled, “Are Syndicates the Killer App of Equity Crowdfunding?”, the trio affirms that lead investors, be they angels or VCs, can inform potential crowdfunding investors about deals they might not otherwise be aware. Equity crowdfunding syndicates fill a major gap in online investing, at least in part the need for investors to be able to actually meet issuers instead of just communicating virtuatlly.
When Congress passed the Jumpstart Our Business Start-ups Act (“JOBS Act”) last year, the rationale sounded right: some “good ideas” don’t come to market because entrepreneurs often lack the necessary connections to privately raise significant amounts of capital. If they could get such funding, the argument went, jobs would be created. And that’s a good thing.
So part of the JOBS Act now permits private firms, including start-ups, to seek equity investments without registering shares for sale, though only from accredited investors. But if implemented, other provisions of the law would allow entrepreneurs and others to use crowd sourcing or social media to troll for money from virtually any would-be private investor. And that’s not such a good thing.