For years crowdfunding sites have provided cash and marketing boosts to entrepreneurs who aren’t afraid to reach out to the public. In exchange, donors receive prizes for their support, ranging from simple displays of gratitude to enormous giveaways for the most generous individuals. One reward they haven’t been able to receive, however, is a stake in the company. For instance, the makers of the Oculus Rift virtual reality headset brought in millions from their 2012 Kickstarter campaign. Facebook eventually purchased the company for $2 billion, providing a big payday for major investors. Meanwhile, the crowdfunders who helped launch the device received nothing.
The site Indiegogo aims to change this. Thanks to a recently passed law, companies can now use crowdfunding platforms to offer equity stakes to small investors. In the past only accredited individuals with annual incomes of more than $200,000 could support such risky ventures. “In a lot of ways, this levels the playing field,” said Indiegogo CEO David Mandelbrot. “This was one of the few areas of the law where citizens were treated differently based on the amount of wealth that they have.” According to the equity crowdfunding site Wefunder, one-third of its investments so far have been for $100, the minimum amount allowed.
While these certainly aren’t bank-breaking sums of money, investing through crowdfunding sites comes with just as much risk as any financial venture. Plus, investments made in private enterprises are largely illiquid, meaning that investors can’t easily take out their money like in the stock market. The process of setting up an equity crowdfunding campaign can also be a headache for entrepreneurs. In traditional campaigns Indiegogo takes five percent of the funds raised with no additional fees. When equity is involved, though, the system gets more complicated. Entrepreneurs must pay Indiegogo $7,000 to cover regulatory costs while also forking over 7 percent of their funds as well as a 2 percent stake in their company. Because of red tape like this, other crowdfunding sites like Kickstarter have vowed to avoid equity-based campaigns.
Questions:
- Why does the law permit only wealthy individuals to invest in risky private enterprises?
- Are equity crowdfunding campaigns good for new companies or do they come with too much red tape?
Source: Stacy Cowley, “Ever Wanted to Back a Start-Up? Indiegogo Opens the Door to Small Investors,” The New York Times, November 15, 2016. Photo by Heinrich-Böll-Stiftung.