Federal crowdfunding legislation that has taken effect over the past 15 months has granted private companies access to a whole new world of potential investors: the general public. But the sought-after hordes of unaccredited investors looking to exchange cash for equity haven’t arrived – at least not yet.
Industry insiders, however, said the numbers should ramp up in the next year or two as the new rules gain more mainstream attention.
“The headline is it’s working,” said Jason Best, co-founder and principal of Crowdfund Capital Advisors, who helped craft the Jumpstart Our Business Startups (Jobs) Act, signed by President Barack Obama in 2012, which contains the equity crowdfunding provisions. The last of the rules did not receive final approval from the Securities and Exchange Commission until May.
“It’s not taking off like a rocket ship,” Best said, “but we didn’t expect it to.”
There are a host of reasons why the rollout has been slow.
For starters, while the Jobs Act represents one of the biggest changes to securities law in almost 80 years, those expecting equity crowdfunding to be an easier option than hitting up friends and family members or pitching investment banks and venture capital firms would be wise to think again, said Mark Lynn, co-founder and president of West Hollywood’s DSTLD, an online seller of high-end jeans.
“It’s not an easier way of raising money, it’s a different way,” said Lynn, whose company has raised more than $1 million from 862 investors since July on equity crowdfunding platform SeedInvest. Lynn said he expects to reach about $3 million by the end of the campaign. “It’s still pretty arduous dealing with the SEC. It’s not for the faint of heart.”
Another reason is that proponents of the changes have had to inform not only the general public, but also educate accountants, attorneys, and others in the finance industry about the rules.
“It’s a new type of investing and a new type of investor,” said Crowdfund Capital Advisors’ Best.
Then there’s the general public’s lack of funds. According to a Google Consumer survey released in December by GOBankingRates.com, roughly 62 percent of Americans have less than $1,000 in their savings accounts – and 21 percent don’t even have a savings account.
“Anyone with less than $50,000 shouldn’t be investing in anything,” said Sara Hanks, chief executive of CrowdCheck Inc., a Virginia firm that performs due diligence for crowdfunding investors and companies.
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