Equity Crowdfunding- New Opportunities, But Caution for Everyday Investors

Christopher Mims noted earlier this week at The Wall Street Journal Online that, “When Oculus VR sold to Facebook for $2 billion in 2014, some asked: What if the people who backed the virtual-reality startup two years earlier on the crowdfunding site Kickstarter had received shares instead of T-shirts or VR headsets?

“They might have seen $100 turn into $14,000, says Richard Swart, chief strategy officer of NextGen Crowdfunding.

Until the past year or two, the Oculus approach to crowdfunding was the only one available to everyday investors who aren’t wealthy. Federal law prohibited Kickstarter and similar platforms from offering shares to backers, so startups doled out merchandise or other perks instead.”

Mr. Mims explained that, “But the Securities and Exchange Commission recently finalized rules based on the 2012 Jumpstart Our Business Startups (JOBS) Act, creating an opportunity for so-called equity crowdfunding, which companies like Mr. Swart’s are eager to promote.”

Nonetheless, the Journal article noted that, “An Oculus-like success story is what the equity crowdfunding industry needs in order to take off, proponents say. However, most of the deals investors are buying into so far suggest such an outcome is unlikely anytime soon.

“Worse, it seems as though many investors will be unlikely to see any return on their investments at all: Some companies appear to be using this funding mechanism as a last resort, having been passed over by professional investors.”

Mr. Mims added that, “It’s clear that the original intention of the JOBS Act—to encourage formation and growth of new businesses in a world in which the stock market is actually shrinking—was a good one. What isn’t yet clear, and won’t be clear for some time, is whether everyday investors will be savvy enough to sort the good deals from the bad.”

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