What is Crowdfunding?
The Securities and Exchange Commission (SEC)describes crowdfunding as
A new and evolving method to raise money using the Internet. Crowdfunding serves as an alternative source of capital to support a wide range of ideas and ventures. An entity or individual raising funds through crowdfunding typically seeks small individual contributions from a large number of people. A crowdfunding campaign generally has a specified target amount for funds to be raised, or goal, and an identified use of those funds. Individuals interested in the crowdfunding campaign – members of the “crowd” – may share information about the project, cause, idea or business with each other and use the information to decide whether or not to fund the campaign based on the collective “wisdom of the crowd.” Crowdfunding has been used to fund, for example, artistic endeavors, such as films and music recordings, where contributions or donations are rewarded with a token of value related to the project (e.g., a person contributing to a film’s production budget is rewarded with tickets to view the film and is identified in the film’s credits) or where contributions reflect the pre-purchase of a finished product (e.g., a music album).” http://www.sec.gov/rules/proposed/2013/33-9470.pdf
In April 2012, Congress passed the JOBS (Jumpstart Our Business Startups) Act, which directs the SEC to create rules exempting crowdfunding from the securities registration laws. Part of this legislation included the CROWDFUND Act, which makes significant changes in current federal and state securities laws.
The CROWDFUND Act will allow entrepreneurs to raise capital by offering to sell interests in their businesses over the Internet. Under the CROWDFUND Act, a small business will be allowed to raise $1 million in a 12-month period by selling its securities to investors without registering that offering with federal or state securities regulators. However, the Act places limitations on how and to whom a small business can sell its securities. The Act directed the Securities and Exchange Commission to adopt rules to implement a new exemption to allow securities sales through crowdfunding. On October 23, 2013, the SEC issued proposed rules on crowdfunding. http://www.sec.gov/rules/proposed/2013/33-9470.pdf
Through crowdfunding, individuals will be able to invest in entrepreneurial start-ups through an intermediary, such as a broker-dealer or a "funding portal." A funding portal is a website, also called a "platform," that advertises the investment opportunities and facilitates the payment from the investor to the issuer. Some portals advertise a variety of investment opportunities on one website, allowing investors to select one or more projects. By law, "funding portals" are not allowed to provide investment advice.