Technology has been one of the largest, fastest-growing industries relying on crowdfunding techniques. Since 2011, crowdfunding has provided startups within the technology industry opportunities to develop prototype products; whether it is a new video game console, mobile application, or drone model, these startups have made equity crowdfunding a major source of capital within their respective industry.
The Crowdfunding Process
Equity crowdfunding occurs when a company receives money from a third party looking for a direct share in that company. The investment capital raised from crowdfunding can be used to expand or promote a business, develop new products, and even as a way to springboard into a larger investment round.
It all started in 2012 with the signing of the Jumpstart Our Business Startups Act (JOBS Act). The JOBS Act created a series of crowdfunding laws which made it possible for businesses to raise capital by soliciting investors outside of their established private networks, a practice that was generally illegal for private companies. Crowdfunding is still relatively new, but certain industries have already taken advantage of it. The technology industry, being forward thinking and innovative, is one of the industries that has benefited most from the new crowdfunding laws.
Effect on the Tech Industry
The technology industry is estimated to produce over eight billion dollars in capital by 2020 according to an article by Small Business Trends. The tech industry benefits on both sides of the crowdfunding phenomenon. Tech companies can raise capital easier than ever before through crowdfunding. Tech companies are also emerging to help facilitate the business of crowdfunding. Financial tech startups will bumps in the road, but there’s no question that the financial industry is being fundamentally changed by crowdfunding and the tech industry.
The King of Crowdfunding
The JOBS Act created multiple ways to crowdfund, but Title II, Regulation D, Rule 506(c) reigns supreme as the single most useful crowdfunding mechanism. Under Rule 506(c), companies can generally solicit anyone to raise capital, but they must only accept investments from accredited investors. These investors must furthermore be properly verified to ensure that they are accredited investor using federally prescribed reasonable steps. Rule 506 raises over a trillion dollars each year, and Rule 506(c) is the way of the future.
Keep an eye on Title III, Regulation CF crowdfunding too. While the current SEC regulations that enable that method of crowdfunding are largely impractical, it’s expected that they will be improved.
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