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Equity Crowdfunding Is Here: Now You Can Own A Share In A Startup's Success (Or Failure)

The most revolutionary portion of the JOBS Act, passed in 2012, goes into effect today. But will it really be a game-changer for small businesses?

Equity Crowdfunding Is Here: Now You Can Own A Share In A Startup's Success (Or Failure)

Illustrations: zeber via Shutterstock

Nick Tommarello has been waiting four years for this: The day when everyday people can start investing directly in companies over the internet. Today Title III of the JOBS Act, signed into law by President Obama in 2012, goes into force, enabling anyone—not just "accredited investors," who have at least $100,000 in assets—to invest in startups, small businesses, and other private firms.

And that means Tommarello's Wefunder platform can move into the next stage. So far he's worked only we accredited investors but now anyone can put money into the companies raising funds.

"When we first started we had to have Congress pass a law, and then we had to wait four years for the SEC to write the rules for the law," he says. "We founded this company for this moment, so we're pretty excited."

Wefunder has 20 companies lined up for today's launch. They include a donut shop, a pharmaceutical firm, and a whiskey maker. Another company is run by Bernard Loyd, an entrepreneur who wants to develop an African American cuisine quarter on Chicago's South Side. They have a range of valuations up to $5 million, and a mix of equity and debt offerings.

Tommarello sees several types of companies drawn to equity crowdfunding: Silicon Valley-style tech firms that want to expand investor circles; social impact startups that want a more direct, cooperative relationship with investors; and "forgotten middle"-type firms.

"There are plenty of profitable businesses out there that really can't get the funding they need to grow," he says of the last group. "The banks don't take any risks and the venture capitalists just invest in a narrow sliver of the economy."

The intriguing question is whether direct crowdfunding offers more than just a way to generate more dollars—-whether it also changes the relationship between investor and business. Will investors, for instance, be prepared to accept lower returns than they might through their Fidelity 401K?

Tommarello says the motivation of most investors isn't to make a bumper return, but rather to put money into something they believe in: "It's to support things they care about and be part of the story. We're really hybrid between equity and perks. Say you invest $500 dollars in a restaurant. You may only get 2% interest, but you also get $500 of free food whenever you want!"

The JOBS Act (Jumpstart Our Business Startups Act) relaxed restrictions on small businesses to raise money. Title III is the crowdfunding part. Potentially, it represents an historic broadening access to direct shareholding. But some have questioned how far-reaching the new rules will be. The SEC has effectively capped the number of investors in any company at 500.

Tommarello says the SEC had a tough job juggling investor protections and opening things up for small firms. But he thinks they could have been more generous on the investor caps. Now firms will be limited somewhat. Investors with assets under $100,000—which is who Jobs III is aimed at—will be able to invest between $2,000 and $4,000 a year.

Another question is whether sites like Wefunder can also be better places to invest—whether it can build collective wisdom. Tommarello is setting up investor clubs of people with specific expertise, in hopes they can effectively appraise and pre-judge companies before they come on the platform.

"We're trying to design a system where we combine the knowledge of experts with people who care about things. We are hoping this can make better decisions for society as a whole."

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