ABC News Column by Alex Mittal, FundersClub’s CEO and Co-founder,
With all the headlines about Twitter’s successful IPO, you may have wondered just how early-stage startup companies get funded and whether it’s something the average investor can get in on or even consider.
Today, new options other than traditional angel and venture capital outfits have become available including online venture capital and equity crowdfunding. But what is the difference between these and why should you care? The fact is that you may now, or very soon, be able to invest in some of these startups online.
Investing in early-stage companies involves substantial risks and many early-stage investments will be unsuccessful. However, the startup investments that do succeed can sometimes yield outstandingly high returns. Tech giants such as Google, Hewlett Packard, Apple and Facebook all began as startups. Will tomorrow’s tech poster child have been first made available to investors online long before its IPO? That is a question on much of the investing community’s mind.
Because of the high risk, startup investment opportunities, by law, have only been open to “accredited investors” — wealthy individuals with a minimum liquid net worth of at least $1 million — excluding the value of their primary residence — or an annual income of $200,000 (or $300,000 together with a spouse).
Read More: Newly Legal: Buying Stock in Start-Ups Via Crowdsourcing
The Securities and Exchange Commission has been reviewing these laws and recently issued some guidelines on Title III of the JOBS Act to allow startups and small businesses to raise as much as $1 million a year from anyone, rather than the pool of wealthy investors who previously were eligible. This is what is referred to as “equity crowdfunding.” The SEC guidelines are not final yet and are open for public comment until early 2014, when another SEC vote is required for this proposal to get fully implemented.
To be very clear: true “equity crowdfunding” is not presently legal or available to investors or startups. In addition, there are many industry watchers who have concluded that even once put into effect, the SEC rules will be so onerous that they will prevent all but the most desperate companies from engaging in equity crowdfunding, creating an adverse selection problem. It is unclear if mounting pressure from the tech community will change this, as the SEC must also contend with consumer protection groups and other interest groups and strike a potentially impossible balancing act with the rules.
Here’s a breakdown of the three main types of funding available to startups:
Source and read More on ABC Online