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Power of the crowd for equity financing

November 25, 2013

The power of the crowd using Internet technology has enabled many new and interesting ideas.

The power of the crowd using Internet technology has enabled many new and interesting ideas.

Wikipedia, the online encyclopedia, was created using the power of the crowd. Individuals continually add and revise content to create an online source of knowledge most of us rely upon often. I do not remember the last time I have even seen a set of book encyclopedias, which was a staple in most homes.

Another example of the power of the crowd is the various websites where one can purchase stock photos for a low price. Thousands of amateur and professional photographers upload and add content to the sites, allowing us to choose from thousands if not hundreds of thousands of photo images at a low cost. Before Internet technology, I understand stock photos were expensive and only provided by professional photographers.

The power of the crowd is soon to be unleashed for those who wish to invest in businesses and for those businesses seeking investors. On Oct. 23 the Securities and Exchange Commission (SEC) voted to allow companies to offer and sell securities through crowdfunding. After a 90-day waiting period to seek public comment for the proposed rules, crowdfunding for equity could be a reality.

Basically here is how crowdfunding works. According to the SEC, crowdfunding is a term used to describe an evolving method of raising money through the Internet. Previously raising money for equity through the Internet was prohibited because it could trigger federal securities laws.

Congress created the crowdfunding exemption last year. Basically, the proposed rules will allow the business to post their funding needs on an Internet crowdfunding portal such as RocketHub and Kickstarter to name a couple, as there are many crowdfunding portals. Then on the investor side, those who meet the criteria can invest in companies through the crowdfunding Internet portals.

To see the proposed rules for companies seeking funding and investors wanting to invest, go to the website and see the SEC news release: SEC Issues Proposal on Crowdfunding.

The purpose of crowdfunding is to allow startups and small businesses to raise equity money in relatively low dollar amounts. This could supplement lender financing or provide part of the needed equity required to qualify for a business loan. In addition it could provide funding if a business does not currently meet a lender’s loan criteria.

What is unknown in crowdfunding is this: as a business grows and needs additional funding, how subsequent investors, angel investor groups and lenders will treat or look upon the previous crowdfunding investments. In any case it looks like the power of the crowd is soon to be here for equity financing for small amounts. How viable it will be remains to be seen.

For more information on crowdfunding, see the mentioned SEC news release or visit

“Business Tips” was written by Dave Erickson, Director and Certified Business Adviser IV of Angelo State University’s Small Business Development Center. Contact him at