Higher Stakes for Crowdfunding

Crowdfunding uses the internet to bring together people with ideas that need money and people with money who like those ideas. Since Kickstarter was founded in 2009, the website and a slew of imitators around the globe have been a launching pad for hundreds of thousands of products like the Pebble Smartwatch or the Sondors Electric Bike. In return for funds that were considered donations, supporters got a discount or a token of appreciation like a T-shirt. What they weren’t originally able to buy was a share in that kind of venture. For decades, only the well-to-do were able to invest in startups and other private companies for an equity stake. That’s changing, as regulations in the U.S. and a range of countries have been loosened to allow people of all income levels to purchase shares through online platforms. Policy makers hope this will make it easier for new businesses to find the funds they need to put ideas into action, lowering a barrier to innovation. Investors hope it will let the little guy get a cut of the next big thing. Regulators are more than a little nervous.

In the U.S., the gates opened in May 2016 for crowdfunding in exchange for shares, also known as equity crowdfunding. The initial response was less than overwhelming: In the first year, about $38 million was sprinkled across 142 companies, according to NextGen Crowdfunding LLC. Offerings included banking and real-estate ventures, such as a chance to put as little as $1,000 into shares of a collection of West Coast commercial buildings. To match investors and opportunities, more than two dozen portals with names like Wefunder and StartEngine had been approved by the U.S. Securities and Exchange Commission to host campaigns for small businesses seeking to raise up to $1 million. A World Bank report says that crowdfunding’s greatest impact may come elsewhere. It estimates that by 2025, almost 350 million households in the developing world would be able to generate $96 billion in crowdfunding investments, half of that in China. That’s despite some high-profile frauds. Chinese regulators have attempted to crack down, but one researcher has estimated that a third of crowdfunded lenders there were “problematic.” The U.K. is also considering tighter rules. The amount invested in startup shares via crowdfunding reached about 330 million pounds ($425 million) in 2015, triple the year before. But by one report, of the 1,000 companies backed by crowdfunded investments there since 2011, only three have been sold.