Crowdfunding is a financing method that raises money by soliciting small individual investments or contributions from a large number of people. It is a popular way to raise funds for a range of artistic, humanitarian, or social causes. Donation-based or reward-based crowdfunding models like GoFundMe or Kickstarter do not provide a financial return.

All equity-based crowdfunding platforms, which raise capital for startups and larger companies, are designed to provide investors with a financial return. Regulated crowdfunding is also an equity-based crowdfunding platform and it provides investors with a financial return, but the difference is the U.S. Securities and Exchange Commission (SEC) regulates it.

The JOBS Act

Enacted on April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act created the United States' equity crowdfunding industry. At first, only accredited investors were allowed to invest. By June 2015, another part of the JOBS Act, Title IV (Regulation A+), went into effect. Title IV allowed larger companies to crowdsource capital from non-accredited investors—ordinary people. Almost a year later, in May 2016, another part of the JOBS Act, Title III (Regulation Crowdfunding) went into effect. It increased the scope of the U.S. equity crowdfunding platform by allowing early-stage startups to solicit offerings up to $1 million within 12 months from either accredited investors or ordinary people. Title III or Regulation Crowdfunding, created 300 million potential new investors for U.S. startups and existing small businesses.

Regulated Crowdfunding

Regulated crowdfunding enables eligible companies to offer and sell securities through crowdfunding. In the United States, all regulated crowdfunding transactions must take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal. To invest, a potential investor must open an account with a crowdfunding intermediary—a broker-dealer or funding portal. All written communications relating to that crowdfunding investment must be electronically delivered. The US Securities and Exchange Commission (SEC) regulates, which investors and issuers can participate and how portal operators should conduct business and adhere to reporting requirements.

There is a maximum aggregate amount a company can raise within 12 months. The SEC limits the dollar amount an individual investor can invest across all crowdfunding offerings within 12 months. Securities purchased in a crowdfunding transaction generally cannot be resold for one year. Regulated crowdfunding offerings are subject to "bad actor" disqualification provisions. The provision disqualifies an offering if the issuer or other "covered persons" have experienced a disqualifying event, such as being convicted of, or subject to court or administrative sanctions for securities fraud or other violations of specified laws.

Growing Global Phenomenon

A regulated crowdfunding ecosystem exists because of technology, the internet, social media, and a progressive government. Because the U.S. government, the SEC, and JOBS Act supporters advocated for regulated crowdfunding, now, investors and potential start-ups have access to regulated crowdfunding, and it has become a growing global phenomenon.