1) What does “crowdfunding” mean? The term “crowdfunding” refers to many people each putting small amounts of money into an exciting business or project. Before the JOBS Act, crowdfunding was mostly about making donations on web sites like Kickstarter or interest-free loans through nonprofits like Kiva. You could get a perk like a tee-shirt or a product sample, but actually making money—what most investors seek to accomplish—was forbidden.
2) What are the different types of crowdfunding? There are four: donation crowdfunding, which is largely unregulated; interest-free lending, which Kiva does, and is not regarded as a regulated security in most states; peer lending, which Prosper and the Lending Club do, which are highly regulated; and investment crowdfunding, which was legalized under the JOBS Act of 2012 (though implementation did not begin until 2016).
3) What are the basic rules governing investment crowdfunding? Any U.S. company can raise up to $5 million per year (until recently, the ceiling had been $1 million). Any investor, including an unaccredited investor, can invest up to $2,200 per year. Investors with more than $107,000 of income can invest more. Accredited investors can invest as much as they would like. And all transactions, between the company and investors, must be done on a federally licensed “portal.”
4) How many Americans have participated in investment crowdfunding? According to recent data compiled by Crowdfund Capital Advisors, more than a million Americans have invested more than a billion dollars in more than 4,000 companies. The average investment is over $800. The average successful raise by a company is over $300,000. We also know, from analysis by Investibule.co, that a disproportionately large number of successful entrepreneurs have been women and people of color.
5) What kinds of securities can be crowdfunded? Almost anything imaginable. Investment crowdfunding is sometimes mistakenly called “equity crowdfunding.” In fact, crowdfunding is sometimes for stock, sometimes for debt, sometimes for royalty, sometimes for pre-sale of products, and sometimes for a combination of all the above.
6) Can real estate be crowdfunded? Yes. Some Title 3 crowdfunding portals, like Small Change, specialize in real estate.
7) Can an investment fund be crowdfunded? No. This is off limits. Investment funds are still mostly governed by the onerous Investment Company Act of 1940.
8) Can I invest my IRA or 401k in crowdfunding? Generally no. But you can if you set up a self-directed IRA or solo 401k. That’s why we have a special section of FAQs around these “do it yourself” (DIY) accounts.
FAQs About the Local Investing & The MD Neighborhood Exchange