Crowdfunding 101: ‘Reg-D’ vs. ‘Rewards’

By Lora Kolodny

Small U.S. investors can donate money to a startup on a crowdfunding site such as Kickstarter, but they won’t get a stake in the company in exchange.

Despite changes in federal law, Americans can’t yet legally put money into a startup in an “equity crowdfunding,” an investment method that is open to ”accredited investors” only.

The Jumpstart Our Business Startups Act, enacted and signed into law in April last year, was meant to enable this. It eased accounting and disclosure requirements on smaller companies to help them go public, aiming to spur growth and create jobs.

The idea was that eventually, investors of every kind would be able to find startups or small businesses that they want to back online, hammer out deal terms and complete the transaction, all digitally.

Under the new leadership of Chairman Elisse B. Walter, the Securities and Exchange Commission is overdue in delivering the rules that will make it possible for startups to attain crowdfunding for equity from “ordinary Americans” (to borrow a phrase from President Obama).

Here’s a quick guide to the two main types of crowdfunding out there right now:

‘Reg-D’ Crowdfunding

For now, only broker-dealers licensed by the Financial Industry Regulatory Authority, and those regulated by the SEC and FINRA can legally conduct these transactions between startups and investors online in the U.S. Likewise, only accredited investors–as defined by the SEC–can use those sites to invest.

This subset of equity crowdfunding is referred to as “Reg-D” crowdfunding, a nod to the SEC’s existing Regulation D and the forms that a privately held company must fill out and file when it sells its securities.

Some sites offering Reg-D crowdfunding in the U.S. today are: AngelList in partnership with SecondMarket; Microventures; FundersClub in partnership with a large national bank that the company declined to name; CircleUp in partnership with W.R. Hambrecht; and Fundroom with securities offered through Wealthforge.

With Reg-D crowdfunding, accredited investors pool their money to provide a seed- or venture-capital round to a promising startup. In exchange, the investors get some stake in that company’s business of course.

The deals done through Reg-D crowdfunding sites may be convertible debt or equity deals, as with early-stage funds from venture firms and angel groups.

‘Rewards-Based’ Crowdfunding

Those more popular (and less regulated) sites offer “rewards-based” crowdfunding. They let almost anyone–not just accredited investors–contribute a few bucks (instead of thousands) to a project or person they like on the site.

Almost anyone can post a project for funders’ consideration, too.

In return for their money, project backers there get a reward, like a logo T-shirt, or a ticket to an event where they can meet the project’s creators.

Write to Lora Kolodny at lora.kolodny@dowjones.com. Follow her on Twitter at @lorakolodny

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

NPRAfter Outcry, Crowdfunding Site Patreon Backs Off Plan To Raise ...NPRThe popular crowdfunding service Patreon has backed off plans to change its payment structure, after widespread, vocal and passionate opposition from creators and their fans. Last week, the site announced it woul [...]

TechCrunchHow hate speech crowdfunding outfit Hatreon crept back online ...TechCrunchIf you want to make a living creating white supremacist content, you're probably not going to do it via sites like Kickstarter and Patreon, which prohibit hate speech. Fortunately there's Ha [...]

EntrepreneurWhy Some Small Business Owners Are Turning to Crowdfunding to Save Their CompanyEntrepreneurMany owners of beloved local businesses, especially in pricier cities, have been forced to swallow their pride and appeal to their customers in times of crisis -- a process streamli [...]

CoinDeskKickstarter ICO? Don't Count On It Says Crowdfunding Leader ...CoinDeskThe company most widely associated with crowdfunding, Brooklyn-based Kickstarter, has no plans to get into the initial coin offering (ICO) business. Coming in response to the news yesterday that compet [...]

ForbesCrowdfunding Do's And Dont's From iFundWomen's Karen CahnForbesDuring our conversation, she was transparent in sharing that her first software company, VProud, failed because she “did everything backwards” and spent too much time trying to perfect the product. “Pe [...]

CryptoCoinsNewsCrowdfunding Giant Indiegogo Looks to Make ICOs MainstreamCryptoCoinsNewsCrowdfunding platform Indiegogo has a plan to help initial coin offerings (ICOs) break into the mainstream, even as the U.S. Securities and Exchange Commission (SEC) is ramping up its oversight of [...]

BBC NewsWu Yongning: Who is to blame for a daredevil's death? - BBC NewsBBC NewsLast month, Wu Yongning went out to do what he loved best - scale a skyscraper without safety equipment and film himself dangling off its roof by his fingertips. What happened next almost seems inevit [...]

TechCrunchFormer Gawker employees are crowdfunding an effort to buy Gawker.comTechCrunchWhile Univision acquired most of Gawker Media's sites last year (and renamed them as the Gizmodo Media Group), the deal didn't include Gawker itself. In fact, BuzzFeed reported last month [...]

NPRCrowdfunding For French CastlesNPRYou too can own a French chateau, in part, anyway. Romain Delaume, CEO of Dartagnans, tells NPR's Scott Simon about a crowdfunding effort underway to preserve La Mothe-Chandeniers. SCOTT SIMON, HOST: What if I told you that for about $60, you [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |