By Aaron Fernando
Though many claim to have pioneered the model of crowdfunding, on a small scale it has always been around. Crowdfunding is a form of finance where a business pre-sells its own goods or services so that it can acquire the required cash and capital to produce those goods and services.
People have been crowdfunding through informal social agreements, pre-sales of gift certificates and other methods for ages, but the digital form of crowdfunding emerged in the late 1990s and grew into popularity by the late 2000s through platforms like Kickstarter. These platforms allowed companies, organizations and even individuals to offer future rewards—their own goods and services—to anyone who funds their projects.
Crowdfunding democratized finance by enabling anyone to fund and fuel the businesses and efforts that they believed in. But in this “traditional” form of crowdfunding (known as rewards-based crowdfunding), only future sales of the organization’s products were offered. Recently, however, there has been an uptick in a model called equity crowdfunding—instead of goods and services, a person gets actual equity in the company. It’s more like investing in shares in a company listed on a stock exchange, except for much smaller companies.
In April 2012, the JOBS (Jumpstart Our Business Startups) Act was signed into law. A section of the bill allowed small firms to publicize their fundraising campaigns and engage in equity crowdfunding without being subjected to SEC regulation. This deregulated finance for small- and medium-sized businesses so that equity could be offered to small-scale investors.
Beyond that, the JOBS Act made investing more accessible to less wealthy and non-accredited investors. Accredited investors are mostly banks, insurance companies and the very wealthy; non-accredited investors were previously barred from these types of investments ostensibly because they may not understand the risks of investing. Yet, as the most recent financial crisis demonstrated, accredited investors are not always better informed.
Where platforms like Kickstarter made traditional crowdfunding easier by maintaining a well-established website and providing standards and templates for crowdfunding, similar services are offered for equity crowdfunding. Fundable, the first equity crowdfunding platform (which also does rewards-based crowdfunding campaigns), launched shortly after the JOBS Act passed. Among others, platforms like Fundable enable smaller and often local businesses to raise startup money and funds for expansion by advertising their fundraising campaigns. Relevant to Arizona which has a strong real estate industry, there are crowdfunding platforms like Fundrise, RealityMogul and Lending Club specialize in real estate.
In 2016, NewSleep.com, an online mattress retailer, and the Ten Fifty-Five Brewing Company in Tucson were two of the first Arizona businesses to take advantage of the new equity crowdfunding laws. Only a few Arizona-based businesses have used this novel form of fundraising, but there are plenty of opportunities. Rather than borrow money and get into debt, businesses are now capable of paying a portion of their future growth back into their communities, using the new tool of equity crowdfunding.
Aaron Fernando is a freelance writer with a passion for working on projects that strengthen communities and regions in innovative ways. He writes about local movements, new economic initiatives, and behavioral economics. Aaron grew up in the Valley, lives in Upstate New York, and can be reached at email@example.com.
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