Crowdfunding: A Guide to Raising Capital on the Internet

CHAPTER 7

Understanding Your Investor Options

Reginald Chambers

Former White House Fellow, The White House National Economic Council

Extending the crowdfunding model to investors that expect a financial return is a significant departure from the perk-based model of crowdfunding, where contributors only expect the campaigner to deliver the promised perk. The relationship between an investor and a business is a long-term proposition where investors will have an impact on the future operations of the business.

Under the perk-based model, it is possible for online users to contribute to risky ventures with material uncertainty as to whether the business will be able to deliver the perk. Expanding crowdfunding to investment is an even higher stakes and riskier proposition than perk-based crowdfunding in large part because investors will expect more than just the delivery of a perk; they will expect a future financial return. In addition to these increased expectations, there is the inherently risky nature of investing in early-stage and small private businesses since they often provide fewer disclosures and historical information to investors compared to more mature and/or public companies. As a result, investment crowdfunding requires greater regulatory oversight to protect investors.

When policy makers in Washington got behind the crowdfunding provisions of the JOBS Act of 2012, they were motivated to provide access to capital for small businesses while protecting investors. Regulators ...