Jackson Ross PLLC

The Different Types of Crowdfunding

In your last newsletter you said that the SEC had not yet legalized crowdfunding, and yet I see all these crowdfunding sites on the Internet. What gives?

The crowdfunding that we discussed in the Jackson Ross PLLC Summer. Newsletter was equity crowdfunding, in which investors are given a stake in a business in exchange for their investment. Because the SEC has not yet promulgated its final crowdfunding rules, current equity crowdfunding websites such as AngelList and CircleUp accept only accredited investors (generally, persons with a net worth of over $1,000,000, excluding residence, or income over $200,000 or joint income over $300,000), which is compliant with Rule 506(c) of the Securities Act of 1933, discussed in the summer newsletter.

However, there are other types of crowdfunding, including donation, reward, and debt crowdfunding, all of which are described below. Note that a person or business does not have to go through a website in order to crowdfund.

In donation crowdfunding, donors are not given anything of value in exchange for their contribution, other than a thank you and, if the donation is going towards a charity, a tax write-off. Donation crowdfunding is largely used by charities and persons seeking to raise money for medical treatment. A popular donation crowdfunding website is GoFundMe.com.

In reward crowdfunding, contributors are given something of value, such as a product or service, in exchange for their contribution. A person seeking to raise money to fund a donut shop may offer donuts to contributors. The most popular reward crowdfunding website is Kickstarter. To give another example, today on Kickstarter there is a bag maker in New York that is offering different styles and sizes of bags in exchange for different levels of contributions.

With debt crowdfunding, investors loan money to a business (or sometimes an individual) in exchange for interest and principal payments. Sometimes the investor will not be investing in one particular person or business, but rather a pool of persons or businesses. According to the securities rules, debt is a security just like equity, so the same regulations that apply to equity crowdfunding apply to debt crowdfunding. Thus, websites that are (legally) offering debt crowdfunding are using a securities registration exemption, such as one of the Regulation D exemptions.

Note that, as discussed in the Jackson Ross PLLC Summer Newsletter, Georgia and other states have passed equity crowdfunding laws of their own, so for entities and investors located in those states there may not be a need to wait for any action from the SEC.