Key stats from the study by EarlyIQ, the Crowdfunding Professional Association (CFPA), and Crowdfund Capital Advisors.

1. 58% of all respondents indicate high interest in early stage equity investment.
2. Annual market size estimate at maturity likely reaches $20B-40B – similar to angel and venture capital markets.
3. #1 demand by likely investors is transparency by the management team.
4. Government review of issuing companies is not a requirement of likely investors with only 5% requiring.
5. Investment intent rises 4-times when a neutral 3rd party provides review of the management team.
6. The likely investor profile is middle aged, upper middle income, urban/suburban dwelling and college educated, with almost 70% indicating a high likelihood to invest.
7. Anticipated investment frequency is 2-3 investments annually, averaging just under $2,000 per investment, for investors with annual household income $75K+.

I think #5 is the most interesting result. The advisory side of equity crowdfunding will be an especially interesting, complex, and (quite possibly) profitable area.

See the entire press release here.

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Around 2006 my friend Erik acquired Chess.com. It was previously a site selling chess learning software. The company went bankrupt, and he bought the assets for pennies on the dollar.

We had worked together on a few projects, so when it came time to fund his new business, he offered me the chance to buy a $25k block of equity. I was ready to jump at the opportunity, but lawyers informed me that since I was not an accredited investor, it wasn’t going to happen. To qualify as an accredited investor, you need to make over $200k/y, or have a net worth of $1m+. So I couldn’t invest, even though I had the $25k (which is not usually the case).

Today those original blocks of equity trade on secondary markets for around $500k according to Erik.

Does that burn? Yeah, sometimes it does. But it’s also the reason I’m so excited about equity crowdfunding. It’s going to open up countless opportunities for business people and investors. That’s if it’s done right (more on that here).

What’s disturbing to me about the SEC’s accredited investor rules is how elitist the whole thing is. The laws are supposedly designed to protect investors, but it’s more about protecting the upper crust and Wall St. Reserving certain privileges for the wealthy under the guise of shielding investors. Kind of like how landowner laws have favored elites for centuries.

What about scams? Well, risk is unavoidable, in any market. Why are we allowed to buy shady pink sheet stocks, but not invest in promising startups?

There’s no good reason to forbid small investors from providing startup capital. It hampers innovation and growth, while reinforcing the financial oligarchy.

Most people assume the laws, even if flawed, are well-intentioned. I don’t believe that, but I guess it doesn’t really matter. Equity crowdfunding is coming, and that’s a good thing. It’ll take the Feds a while to get workable regulation in place, but that’s par for the course.

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As we have pointed out before, equity crowdfunding regulation has many flaws. The $1m limit is a major problem in and of itself. And it brings many unintended consequences along with it.

Think about the hypothetical situation I pointed out in my last post.

Let’s say Google executive Matt Cutts leaves the company to found a competing search engine. God knows why, but he decides to go the equity crowdfunding route. That’s despite the fact that instead of t-shirts or beta access, he’s giving away part of his business. And he’ll only be able to raise $1m, compared to the $10+ he would likely raise on Kickstarter.

His fundraising hits the JOBS Act $1m limit in ~3m.

This would be an amazing opportunity. One of the brightest engineers in search starting a Google competitor. Everyone in the VC/angel/ECF/seed space would want in. But only the first $1m in gets a piece.

It’s very likely that word about a hot deal like this would leak. When it launches, people will be ready. Likely using scripts, they’ll snap up as much as they can the second it goes live.

As I understand it, this would be perfectly legal. In fact, I’m looking into how it could be done.

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As a preface to this piece, let me say I am a big supporter of equity crowdfunding. It’s ridiculous that we, as non-accredited investors, have not been able to invest in startups until now. Due to the accredited investor laws, I personally missed an opportunity to invest $25k in my friend’s startup in 2006, and it’d be worth $750k today.

But as written, the (still not finalized) JOBS act is fundamentally flawed. The $1m/year limit on fundraising cripples it from the start. In the US, the philanthropic side of the industry raised $3b in 2012, and it’s only 3 years old. Indiegogo and Kickstarter are doing $10m deals, regularly. Equity crowdfunding could, and should be much bigger. As big as the NYSE if we let it. Cheaper, more equal, and no high frequency trading (hopefully).

Explosive growth is inevitable in the space. But if we want it to happen efficiently, and soon, the government needs to give it space. When deals sell out in under 5 minutes, people are not going to be happy. When entrepreneurs pick Kickstarter over Crowdfunder, the economy is damaged. Distributing equity to small investors is a fundamental element of the economic engine.

It rewards smart business, and smart investing, and encourages more of both, which has a compounding growth effect on the economy. And every day we delay, we are compounding our growth losses. You want real growth? Raise the limit to $100m. Wall St’s monopoly would fade away, and small business would thrive.

Hypothetical

If you’re not convinced that ECF legislation is flawed, consider this example. Let’s say Google executive Matt Cutts leaves the company to found a competing search engine. God knows why, but he decides to go the equity route. That’s despite the fact that instead of t-shirts or beta access, he’s giving away part of his business. And he’ll only be able to raise $1m, compared to the $10+ he would likely raise on Kickstarter.

His fundraising hits the JOBS Act $1m limit in ~3m. He’s ok with that, but probably regrets not going the philanthropic CF route. He could have given away 1/10th the capital and raised 10x as much.

Now, I’ve met Matt, and he’s scary smart. Ran into him at the Wynn during Pubcon 2007 and chatted for about two hours. He was sober, I was tipsy, and he was trying to find out what SEOs are doing to game Google these days (I do web marketing by day). He joined GOOG in 2000 ( and is the head of search quality. PhD from UNC (my hometown, go Heels).

And I’m pretty sure he, and most intelligent people in his (hypothetical) position would pick Kickstarter over an equity crowdfunding option. Why wouldn’t he? Issue equity shares, or give away shirts and beta access?

$50m. That’s the minimum limit we need. Ideally, there should be none. I realize that’s not going to happen, so am pushing for a nice, round, bureaucratic number that politicians will understand.

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The JOBS Act arbitrarily set a $1m/year limit for equity crowfunding (ECF).

Meanwhile, Kickstarter-style sites will still be able to raise $10m+. Like in the Pebble watch project.

The result is that ECF-style deals are at a disadvantage vs. philanthropic ones . Entrepreneurs who want to shoot for the moon are likely to try donation-based funding first. Not much bad can happen if they do. And if they don’t raise $10m with their campaign giving away stickers and t-shirts,  there’s always equity crowdfunding, despite the $1m ceiling.

And besides, a million dollars is such a round, bureaucratic number. Why a million? For one, bigger numbers would represent a threat to Wall St. Fully audited companies raising big money on new platforms with low fees, no preferential treatment IPOs, and no high-frequency trading? That is something to be squashed if you’re the NYSE, Goldman, or JPMorgan.

Crowded Out

Today a Kickstarter movie raised $2.1 million. In about 8 hours. Imagine if people were getting equity! That would have reached the SEC”s limit in minutes.

We need a very high deal-size limit, or the whole thing could be set back years. Algorithmic traders might eventually auto-buy offerings based on set criteria (if Ycombinator is in, buy). Deals could sellout in less than a minute, and make Black Friday look like a Mormon birthday party.

If you agree it’s a problem, consider contacting the SEC and letting them know. And maybe tell them to finalize the regulations while you’re at it. They’re over deadline and time’s wasting.

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