Investors sprinkled about $38 million across 142 companies in the past year under new rules that allowed equity crowdfunding for nonaccredited investors. That’s a surprisingly slow start, experts say.
It’s been a year since U.S. rules went into effect enabling anyone — not just the ultrawealthy — to buy a slice of a startup. Turns out, few are interested.
Investors sprinkled about $38 million across 142 companies since May 2016 when Title III of the Jobs Act allowed equity crowdfunding for nonaccredited investors, according to data from industry tracker NextGen Crowdfunding.
The slow start is a rounding error in the larger system — venture investors plowed more than $69 billion into startups during 2016, according to the National Venture Capital Association — and a little surprising, said Richard Swart, a founding board member of the Crowdfunding Professional Association. “Everyone in the industry thought there’d be more uptake,” said Swart, who also is NextGen’s chief strategy officer. “We all expected these numbers to be 2X to 5X what these numbers were.”
Swat said the practice is still in its infancy. Wefunder, StartEngine and SeedInvest are the primary crowdfunding platforms, and many founders aren’t aware that equity fundraising is an option. Of those who explore it, many decide it’s not worth the hassle and expense.
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NextGen data show companies typically spend from $20,000 to $50,000 on legal, accounting and marketing — a serious outlay for a startup that’s only looking to raise a couple hundred thousand dollars.
Technology startups have largely ignored the new fundraising option because they benefit more from the existing system. Founders can raise an unlimited amount of money from accredited investors without spending a dime or having to broadly publicize company financial information.
Although the Jobs Act passed in 2012, regulators spent four years massaging details and installing safeguards until they were confident small-time investors would be protected. There may be additional tweaks to the law, but for now the maximum a company can raise via crowdfunding is $1 million.
“We are at year five in a 10-year process,” said Swart, calling the first 12 months a learning period. “I’m optimistic the Congress and the SEC will dial back on the regulation.”