On Monday, May 16th, Title III of the JOBS Act finally started being enforced (4 years after President Obama signed it into law). This means that you no longer need to have a net worth greater than $1 million, or $200,000 in annual income, to acquire equity in startups through crowdfunding. The abolishment of these requirements set back in 1933 opens up the startup game to everyone, as well as its inherent risks and rewards.
This is a significant game changer for the incubation of new businesses and supporting services. Instead of getting merchandising or guided plant tours, now any individual can invest $2,000 a year or more in their favorite startup and get equity shares in return. Consequently, it is expected that the access to venture capital will become more democratic and abundant, though each business still faces an annual cap of $1 million for capital obtained through crowdfunding. Platforms like Wefunder and Indegogo are already adapting to this reality.
The new times are particularly exciting for entrepreneurs with “crazy” ideas, given that venture capitalists tend to be somewhat conservative when allocating their funds. Their typical strategy is to fund a disruptive business idea only when there are several startups pursuing it. This strategy is based on the premise that if there are several independent entrepreneurs working on a new product or service that is similar, then a novel trend is being created. At least one of them is expected to succeed and generate enough profits to cover the money lost on funding the competing startups, and reward the venture capitalist.
Notwithstanding, investors should not neglect the risks that come along with the democratization of crowdfunding. More freedom means more individual-specific responsibilities. As an investor you are responsible for your own ignorance. You need to study the proposed business model in-depth, investigate the richness and veracity of the curriculum of each entrepreneur, and do your own market research before jumping in. It is not all roses. In addition to geniuses and honest wannabe entrepreneurs, such freedom to invest is expected to attract more scammers and nutcases to the startup community as well. More freedom in the financial sector is a double-edged sword, as the 2008 economic meltdown so bluntly demonstrated.
Despite the potential drawbacks of what is coming, it is time to rejoice. More freedom in crowdfunding may very well become another rung to help you move up on the socioeconomic ladder. Investing in startups is now a game that we can all play, not just the rich, and the likelihood of winning is higher than at the casino, if you do your homework. The increasing dissemination of information throughout the Internet can certainly help you minimize uncertainty. There are many sources to learn about the latest trends and market developments but very few, if any, provide earnings estimates for free. That is the uniqueness of LaunchScore, our free web platform for entrepreneurs and investors that want to learn about the statistical estimates for potential yearly earnings based on US data by city and business type. LaunchScore does not do it all for you, but thanks to its disruptive business model, it freely gives you what nobody else will.