Will the most successful crowdfunding portals be restricted to accredited investors?
This is an interesting question, and one to which no one really has an answer yet. To some extent it will depend on what the SEC decides to do with the regulations surrounding the whole subject, which they have until the end of the year to write.
My personal guess is that the early stage funding world will likely trifurcate (or even quadricate, if that’s a word) into several distinct groups. In each of the groups, there will probably be the usual breakdown of the industry leader, the significant #2, and the rest of the pack. At the moment, my guess is that it will shake out as follows (and I absolutely reserve my right to come back and edit this answer as things begin to play out, so that I’ll always be right!
1) Non-equity, creative project crowdfunding portals, which are currently allowed and are not subject to legislation under the JOBS Act. I think that Kickstarter has clearly taken the lead here, with Indiegogo being the fast follower, and many others doing decent business in specialized industries or geographic regions. I believe this is likely to continue, and that at least the two leaders will be very successful.
2) Pure-play equity crowdfunding portals as directly envisioned by the JOBS Act. By definition, none of these are operational yet because they won’t be legal until the beginning of 2013, but there sure are a lot of folks throwing their hats into the ring here. I wouldn’t even hazard a guess in this group until we see who the players are, with their particular wrinkles and implementations. It’s going to be very crowded, very noisy, and probably not very lucrative for the funders (although it will likely put quite a bit of cash into new startups.) But I don’t doubt that there will be a couple of these portals that will do very well, garner significant investment, and pull away from the crowd.
3) Hybrid equity crowdfunding portals, probably registering under the JOBS Act, but using alternative/creative ways to structure the investments that will aim to make this a serious, viable funding path for high-growth companies. This is going to be an interesting area, because it will appear (I think) to be a lot less sexy than Group 2, but will turn out to be the part of crowdfunding that actually works. My first bet in this area would be Seedrs, a startup based in the UK (but founded by an American securities lawyer) that has been very involved in the legislative process so far, and really understands how the equity markets work. I know of at least one other hybrid platform that’s coming from some similarly experienced players, and my guess is that there will be still others entering this tranche. Almost by definition, however, they will be taking it in cautious steps.
4) Accredited Investor funding portals, which may or may not register under the JOBS Act, but will restrict themselves to the exempt, upper part of the market. The two obvious players in this space are Gust and AngelList, but at this point I think it’s still unclear how both companies will end up playing their hands (and yes, I say that as the CEO of the former). The choice as I see it will come down to whether the portals become fully registered Broker/Dealers and actively facilitate financings for a percentage of the raise; or whether they remain platforms for discovery and ancillary activities, but not transactions, basing their business models on other aspects of the investor/entrepreneur relationship. At the current time, both platforms seem to be taking the latter approach, but it’s still very early in the game. And just in case you couldn’t guess, yes, I think that both of these will be very, very successful.
*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *
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