Startups can raise up to $50 million by selling stocks online. It opens the door for online crowdfunding platforms.
Securities and Exchange Commission adopted final rules to facilitate smaller companies access to capital on March 25, 2015. The new rules provide investors with more investment choices.
Only individuals called accredited investors could easily invest in startups before. Some websites already provide opportunity to invest in startups online, but prospective investors had to be accredited and subject to more stringent regulations.
“This is overwhelmingly good news, as it opens up a new path for small private companies to raise money directly from their communities, customers, and followers, and a new way for members of the general public to invest in startups, local companies, and new kinds of investment without being ‘accredited investors,'” says editor of CrowdExpert.com, David Pricco.
Startups will be able to raise up to $50 million in a year. Any individual may to participate but only up to 10% of net worth. But Online equity platforms will still need to be registered with the SEC as “broker-dealers,” which means they will be regulated financial institutions authorized to be middlemen in the buying and selling of stocks, bonds and other securities.
Startup investing is still risky. There are not a lot of concrete data about success rates. Shikhar Ghosh has found that 75% of startups fail. Even the best venture capital funds fully miss on a third of their investments.
There is also concern about the broader impact of the possible influx of cash from equity crowdfunding. Growing concerns about inflated valuations of startups bring some to argue that tech is experiencing a bubble — in which prices rise quickly before falling just as fast.
Investor Mark Cuban said in a blog post that the rise of equity crowdfunding is one of the reasons of the current bubble. He argued that inexperienced investors have pumped money into the startup market, but have no way to get it out.
Crowdfunding also has its supporters, like AOL co-founder Steve Case, who said that he agreed some valuations have become “excessive,” but argued that equity crowdfunding has a positive impact beyond opening up a new pool of investment capital.
Just how many people might be interested in dropping money on a startup is the subject of some discussion, but the World Bank projects that the worldwide equity crowdfunding market will hit $93 billion until 2025. Crowdfunding investment platforms are now active in countries around the world.