What is one of the hardest aspects of starting a new company or venture? As you probably guessed, it is obtaining the financial backing for an idea or concept. While many entrepreneurs turn to more traditional methods such as investors or applying for a loan, more and more aspiring businesspersons are turning to an alternative route – Crowdfunding.
Crowdfunding is the collective effort of individuals who network and pool their money together to support concepts initiated by other people (or organizations) and fund projects, causes and even companies. Some of these platforms use what is called “donation based” or “rewards based” crowdfunding to allow supporters to contribute into a given project that may be scientific, artistic, or charitable in nature and could include films, games, music and gadgets. In this model, in return for a cash contribution, the supporter might receive a t-shirt, sticker, or even tickets to an event.
Other crowdfunding platforms use what is called a pre-purchase model. In this instance, in return for funding an entrepreneur’s business, the supporter receives the crowdfunded product which could range from clothes to new tech gadgets.
Currently, the Securities and Exchange Commission (SEC) is reviewing a type of crowdfunding called equity crowdfunding. In this model, a supporter would actually be able to purchase equity shares in a company.
On Wednesday, October 23rd, the SEC pushed forward a proposal to help guide a new strategy for the crowdfunding industry. Equity crowdfunding for the general public has been in a state of limbo, bogged down by rulemaking delays, since receiving the go-ahead in early 2012 as part of the Jumpstart Our Business Startups Act, or JOBS Act. The JOBS Act was created to relieve restrictions on capital-raising across a wide gamut of finance – from IPOs to start-up seed financing.
The recent proposal includes a 90-day comment period where members of the public can comment on the proposed rules. This will be followed by another 90-120 days for the SEC to comment and possibly amend the rules. The rules put forth are very similar to those proposed in the initial release of the JOBS Act and are summarized below:
- Startups cannot raise more than $1 million in any 12-month period.
- Investors with annual incomes or a net worth below $100,000 can only invest $2,000 or 5% of their annual income or net worth, whichever is higher
- Investors with annual incomes or a net worth above $100,000 can only invest up to 10% of that annual income or net worth.
- Transactions must be conducted through an intermediary. Intermediaries include registered brokers, or as a new type of entity called a “funding portal.”
While delays in rule-making have brought hurdles to the industry, crowdfunding has continued to push forward and has seen a marked rise in popularity, with websites like Kickstarter, Indiegogo and Prosper leading the charge. As the crowdfunding industry continues to evolve into a common financing method, it has become more important than ever verify the identity of legitimate investors and entrepreneurs – to not only meet compliance, but also deter fraud.
The IDology platform offers a complete and on-demand solution to confirm the identity of both investors and entrepreneurs in real-time, making it faster and easier for crowdfunding portals, platforms, and intermediaries to drive entrepreneurship as well as investment opportunities.
The IDology platform allows customers to meet and remain compliant with all of the required rules and regulations, including Know Your Customer (KYC), CIP (Customer Identification Program) and/or US Patriot Act Compliance. As the crowdfunding industry quickly expands, choosing a solution that creates a trustworthy environment for entrepreneurs and investors to interact is essential.