Seed Equity Ventures is a registered broker dealer with the SEC and a member of FINRA/SPIC , that connects investors and entrepreneurs on a global scale. They used their global experience to offer a proprietary social investing platform aimed at helping entrepreneurs find the capital they need and reducing the downside to investors.
Investing in startups can have hidden concerns that are not always evident to a typical investor. Most startups have hazards and rewards unlike the typical buying bonds or the shares of stock. Because crowdfunding is in its infancy, it often requires an experienced investor to read between the promotional jargon.
“I think crowdfunding is really important now to the entire entrepreneurial process,” says Todd Crosland Founder, Chairman and CEO of Seed Equity Ventures. “There’s a void between bootstrapping and getting venture financing. That’s where crowdfunding comes in, to fill that void.”
History of Crowdfunding
In 1997, the British rock band Marillion, a little-known group with a cult following in America, financed a reunion tour by taking online donations from fans. This creative method to raise capital caught the attention of ArtistShare, which became the first crowdfunding platform in 2000.
From these humble beginnings, crowdfunding has grown into a popular choice for entrepreneurs to raise capital for their ventures. Most of the early projects that raised funds were artist or technology driven opportunities with supporters receiving an incentive for their financial backing. This could be anything from a signed CD for a band to a prototype of an invention.
The money raised from crowdfunding varies from thousands to millions. By 2011, the industry had grown to the point that over $1.5 billion was poured into the various projects.
JOBS Act Opens Doors
In 2012, the Jumpstart Our Business Startups (JOBS) Act became law and when the law is fully implemented by the SEC and Finra, it has the potential to change the way entrepreneurs raise capital in the future. Currently, only Title II of the Jobs act has been implemented. Title II allows for Issuers to use General Solicitation in raising capital and is reserved for accredited investors only. Title III of the Jobs Act, which would allow non-accredited investors to participate in Crowdfunding, has not been approved yet by the SEC or Finra. This is anticipated by the end of 2014. When Title III of the Jobs act is fully implemented, Crowdfunding platforms will then be able to issue shares to small investors, whereas before they could only sell stock only to ‘accredited’ investors with a net worth of more than $1 million, or an annual income in excess of $200,000 ($300,000 for couples.) In addition, the JOBS Act removed the ban on general solicitation that prevented entrepreneurs from publicizing the fact that they’re raising money.
“By creating the opportunity to raise equity, title III of the JOBS Act, when fully implemented will open up the industry to traditional investors that wanted a share of the company,” says Todd Crosland of Seed Equity Ventures. “Instead of a personalized reward for their involvement, investors could now share in the growth of the company.”
Potential and Peril
Title III of the Jobs Act will allow crowdfunding platforms to issuing stock, it was hoped that promising startups would have increased access to investor capital. The legislation also opened up the potential for criminal enterprises to perpetrate large-scale fraud by issuing worthless or tainted shares and then closing up shop and moving on. Industry leader Kickstarter cancelled an offering from a company called Little Monster Productions that was raising money for a game called Mythic: The Story of Gods and Men.
It turns out that Little Monster Productions appropriated images from another gaming site and had no rights to the characters. Kickstarter shut down the funding drive after they had received pledges for $4,739 toward an $80,000 objective.
Protect Your Investment
Most crowdfunding opportunities are highly speculative, but there are some ways to limit the risks. Investors who put money into a startup know there is always the chance of failure, but they do expect the play to be legitimate.
Before investing in a crowdfunding opportunity, treat it like a traditional investment and perform some due diligence. Have a qualified accountant look over the company’s financial statements and corporate tax returns, and verify that the business is licensed to operate from city, county, and state agencies.
“Many crowdfunding opportunities are fun and play on the investor’s artistic or creative interests,” says Todd Crosland of Seed Equity Ventures. “This does not mean that a person should just throw away their money on a whim. The reason a person invests is to make a profit; if not, it’s just a money losing hobby.”
Peer-to-Peer Lending Communities
Another way to participate in crowdfunding opportunities is to join a peer-to-peer lending community like Prosper or Lending Club. These sites are different from other crowdfunding platforms, as investors lend their money and can see a return on their investment.
These investments offer thousands of people the opportunity to loan money to borrowers, which they then put towards paying back debt from somewhere else. The sites advertise that investors can get a better return than with conventional lending, and the borrowers receive lower rates than traditional financing.
The rise of crowdfunding opportunities for investors has changed the way that many new ventures will find access to capital. Although the game has changed, the rules around smart investing are still the same. Seed Equity Ventures believes that with careful planning, both investors and the ventures they finance can prosper.