“Crowdfunding” is a term used to describe raising small amounts of money from many people. The concept is used often by charities, artists, video game developers, technology companies, and politicians to harness the loyalty of a crowd and rally them financially around a shared cause, product or project. This type of crowdfunding is known as donation- or rewards-based crowdfunding. Until recently crowdfunding did not generally involve the issuance of securities.
Equity crowdfunding is emerging as a way for businesses, particularly start-ups and small businesses, to raise capital. Traditionally, investment opportunities are offered by professionals, such as broker-dealer firms and investment advisers, who must recommend investments that are based on their clients’ investment objectives, risk tolerance, and levels of sophistication. Through the crowdfunding exemptions, FCNB provides registration and prospectus exemptions that allows start-up and early stage companies to raise capital, subject to certain conditions.
The equity crowdfunding model involves investors backing a small or start-up business in exchange for shares or another eligible security. Do not confuse equity crowdfunding with the donation or reward based crowdfunding activities on websites like Kickstarter, IndiGoGo. These websites only support donation-based projects and do not allow contributors to become shareholders in the company. The new exemptions do not apply to them. Visit “Crowdfunding Models” to learn more about the different types of crowdfunding and some key characteristics of each.
Click here for full details of the types of securities eligible for equity crowdfunding.