Judd Hollas, founder and chief inventor of EquityNew, contributed this article to BusinessNewsDaily's Expert Voices: Op-Ed & Insights.
A little more than a year ago, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. The JOBS Act was intended to increase access to capital for the innovative companies that produce the majority of employment growth and are otherwise starved for investment capital. These early-stage startups do not have access to traditional bank loans and venture capitalists disproportionally fund growth-stage, high-tech ventures, leaving otherwise potentially lucrative and promising ideas out in the cold.
However, new data actually shows that equity crowdfunding is already aiding the vast business community that was previously underserved by the traditional private equity community (VC firms and angel investors). In fact, recent data indicates that around half of the companies using equity crowdfunding are consumer and business product/service companies — an area that was previously less than 10 percent of angel/VC activity. Interesting, equity crowdfunding is proving to be very active throughout the U.S., primarily due to the ubiquity of the Internet, with approximately 75 percent of equity crowdfunding projects being pre-revenue, or early stage, and a vast majority of them being non-tech.
Even though currently limited to accredited investors, equity crowdfunders — like EquityNet — are addressing 90 percent of the business community that was previously starved for capital, namely business and consumer product/service companies, early-stage startups and non-tech companies. Geographical biases that persist in the brick-and-mortar VC world are significantly diminished with equity crowdfunding and more than half of issuers seek significantly less than $1 million in investment capital, the legal obtainable limit from unaccredited investors according to the JOBS Act.
While it may seem less noteworthy, the data also indicates that 50 percent of companies seek less than $500,000 in capital through equity crowdfunding. This dynamic directly combats critics' theory that the JOBS Act's crowdfunding provisions will be ineffective or irrelevant due to the relatively low funding limit of $1 million annually from unaccredited investors. It should be noted, however, that issuers are also allowed to raise unlimited amounts of capital from accredited investors via crowdfunding.
With a number of marketplace insights and analysis now circulating in the marketplace, many of them support the true intention of the JOBS Act to spawn business formation, business success and job creation through the democratization of capitalism. The data presented here also corroborates industry analyst Massolution's April crowdfunding report which stated that rewards-based crowdfunding, most commonly used by early-stage companies to pre-sell a product to fund their development, had grown by more than 230 percent in 2012. These research findings confirm not only what we instinctively knew more than a year ago when the JOBS Act was passed — that the capital formation process was broken — but that alternative, disruptive funding mechanisms do work for both investors and entrepreneurs.
Simply put, data and industry experts all point to the fact that companies drawn to equity crowdfunding are those that were previously very much underserved by the traditional angel and VC market. This progress will only continue once the SEC and FINRA finally release their rules governing true crowdfunding that will allow average, unaccredited investors to contribute to the development of America's next great companies.
The views expressed are those of the author and do not necessarily reflect the views of the publisher.