Read below to for answers to some frequently asked questions (FAQs) about crowdfunding. Also, be sure to download our crowdfunding cheat sheet here.
What is Crowdfunding?
Simply put, crowdfunding is a method of raising money from a large number of people, often via the Internet. Well-known sites such as Kickstarter, Indiegogo, and GoFundMe allow people to fund a project or donate to a cause in exchange for a product or goodwill.
What are the different types of crowdfunding?
There are four types of crowdfunding: (1) donation-based crowdfunding, where campaigns collect money with no promise of anything in return (i.e. GoFundMe); (2) rewards-based crowdfunding, where the sponsor sets various levels of rewards that correspond with pledge amounts (this is currently the most popular type of crowdfunding—i.e., Kickstarter and Indiegogo); (3) equity crowdfunding, which is the exchange of shares of a private company for capital (i.e., SeedInvest, AngelList, Crowdfunder; and (4) debt crowdfunding or marketplace lending, which is the raising of capital in the form of a loan, whether for a personal, small business, or real estate loan (i.e., Prosper, Lending Club, FundingCircle).
Generally, the first two types—donation and rewards-based crowdfunding—do not fall under securities law, and are instead regulated by the Federal Trade Commission. The latter two types—equity and debt crowdfunding—do fall under securities laws and are regulated by the Securities and Exchange Commission, as well as state-level regulators.
What is Equity Crowdfunding?
It is the same thing as donation or rewards-based crowdfunding, except that instead of receiving good will or a reward, the investor actually gets a return on investment. It serves as an alternative way for businesses and companies to raise capital. Equity crowdfunding (also called “investment” crowdfunding) often refers to Title III/Reg CF crowdfunding. It’s a bit of a misnomer since companies can raised equity OR debt.
What is Regulation A+ and how does it work?
Regulation A has been around for years, but was never widely used because of the its high burden and costs relative to the low amount that could be raised (the max offering amount was capped at $5 million per year). However, with the passage of the JOBS Act in 2012, the SEC was able to implement changes to Regulation A, most notably an increase in the maximum dollar amount, that would later be known as Regulation A+. The changes were finally adopted in mid-2015 and created two tiers of offerings. Under Tier 1, companies can raise up to $20 million per year from both accredited and non-accredited investors. Under Tier 2, companies can raise up to $50 million per year from both accredited and non-accredited investors but there are certain limits on the amount an individual can invest. Since a Regulation A+ offering is like a mini-IPO, issuers must have their offering documents and disclosures qualified with the SEC. A Regulation A+ offering is unique in that it allows companies to publicly advertise their offering while accepting funds from non-accredited investors. See the Crowdfunding Cheat Sheet for more details.
What is Regulation D?
Regulation D is a commonly used private placement exemption, meaning that it allows private companies to raise capital without going through the SEC’s normal registration process. Traditionally, there was only one type of Rule 506 offering, which prohibited general solicitation (or public advertising) and limited the offering largely to accredited investors only. Post-JOBS Act, Rule 506 of Regulation D created two types of exemptions. The traditional Rule 506 exemption became known as “Rule 506(b)” and a new type of exemption, known as Rule 506(c) became effective in Fall 2013. Rule 506(c) allows private issuers to generally solicit, or advertise, their offering, but actual investments must be from accredited investors only. Further, the issuer must take “reasonable steps” to verify that investors are actually accredited. See the Crowdfunding Cheat Sheet for more details.
What is an accredited investor?
An accredited investor (if an individual) is a person who has an income over $200,000 for the last two calendar years (or $300,000 if they filed jointly) or a person with a net worth over $1 million excluding their primary residence. Entities may also be accredited investors, though there are various definitions that apply depending on the type of entity. There has been discussion at the SEC to change the definition of an “accredited investor” but no actual change in the definition as of the time of writing of this FAQ.
What’s the difference between real estate syndication and real estate crowdfunding?
At the highest level, many describe crowdfunding as simply online syndication. If you want to dig into semantics, syndication is the structuring of a deal, whereas crowdfunding is a method of raising capital. Please read this article for more detail.
What is Regulation CF?
Title III of the JOBS Act allowed the SEC to create a true ‘equity crowdfunding’ rule that would allow companies to raise money online from anyone–not just accredited investors. Regulation Crowdfunding (aka Regulation CF or Reg CF) became effective in May 2016. Small companies can raise up to $1 million under Reg CF from both accredited and non-accredited investors, but must do so through a registered broker or portal. There are also limits on the individual investment amount similar to Tier 2 of Reg A+. See the Crowdfunding Cheat Sheet for more details.
Which funding method is best for me?
It depends on a lot of different factors, including the type of business you run, how much money you wish to raise, your financials, the types of investors you wish to solicit, etc.