Below is an article by the MIT Technology Review entitled “Regulation Is on the Horizon for Equity Crowdfunding Sites”
Regulation Is on the Horizon for Equity Crowdfunding Sites
By Ted Bunker, MIT Technology Review
November 23, 2015
When Eric Migicovsky needed more money to build the Pebble smart watch in 2011, he and his partners pitched their plan to venture capitalists. Initially Pebble had gotten early backing from well-known investors, but when the founders went back to the traditional venture capital community to raise the money they needed to refine the prototype and put it into production, they came away empty-handed. As cash dwindled, they designed and launched a campaign on the crowdfunding site Kickstarter in April 2012. It was a smash. Their bid for Pebble preorders quickly generated almost $10.3 million in commitments, a Kickstarter record. A proposal for a second version, called Pebble Time, raised over $20.3 million. In about four years, Pebble’s workforce went from just Migicovsky to 130 employees today, and the company has sold well over a million watches.
Today there are dozens of crowdfunding websites where you can pitch a product or plan, ask for financial support from total strangers—and get it. Estimates of the money raised through crowdfunding sites last year range as high as $5 billion. In exchange for money, backers generally get the future product once it’s completed. Migicovksy’s backers got a smart watch. Supporters of another well-known example, Oculus VR, got a developer kit for a virtual-reality headset. Oculus, which raised over $2 million in a Kickstarter campaign that began in August 2012, was acquired by Facebook for $2 billion less than two years later.
None of Oculus’s many crowd backers got a cent of that $2 billion. But now some platforms have started to move from a purely loan-for-product model to one offering small amounts of equity in the companies seeking to raise capital. Sites like Crowdfunder, EquityNet, and CircleUp offer this chance, but the money invested this way is far less than what firms typically pull in through IPOs.
For investors, crowdfunding has drawbacks that public markets don’t. The risk of fraud can be significant. And unlike investors in publicly traded IPOs, crowdfunders have virtually no way to sell if they want to. “There is zero liquidity,” investor Mark Cuban wrote in a critical blog post in March. “If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it?”
Greater regulatory oversight would help address these issues. Rules governing equity crowdfunding have already been proposed by the U.S. Securities and Exchange Commission; under them, issuers would be limited to raising no more than $1 million during a 12-month period, and investments by individuals would be capped as well.