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Regulation Crowdfunding Offers Option For Startups to Raise Much-Needed Capital

  • Regulation crowdfunding allows entrepreneurs to sell ownership shares in their venture to raise starting capital
  • The practice is done through intermediaries registered with the SEC
  • Participants tend to be local supporters, though wealthy investors have played a greater role during the COVID-19 pandemic

Crowdfunding has typically been associated with platforms that allow people to donate to a charitable cause or offer rewards for people who contribute to a creative project. As small businesses struggle to secure financing to access initial cash for their company, a trend that started before COVID-19 but has been exacerbated by the pandemic, another form of crowdfunding has been gaining popularity as a means of support.

Regulation crowdfunding, also known as equity or investment crowdfunding, gives entrepreneurs an opportunity to attract people who want to share ownership in a venture. Companies participating in regulation crowdfunding sell securities online through an intermediary broker-dealer or funding portal that is registered with the Securities and Exchange Commission. Securities can include equity, debt, convertible notes, or other methods of investment.

The SEC caps the aggregate amount that can be raised through crowdfunding in 12 months at $1,070,000, limits the amount individual investors can contribute across crowdfunding offerings during a 12-month period, and requires information disclosures to the SEC, investors, and intermediary. Securities can typically not be sold for one year after purchase.

Since 2016, regulation crowdfunding has raised about $500 million while generating four times as much in economic activity and supporting 100,000 jobs. Most investors using regulation crowdfunding have been on the local level, such as friends, family members, and customers. However, wealthy investors have taken a greater role during pandemic, often supporting hard-hit industries such as restaurants or personal services.

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