5 Things to Know About Crowdfunding

Concert Crowd

Recent changes in investor regulations by the Securities and Exchange Commission have created a buzz among startups by making fundraising easier. The new rules mean investors can pitch in as little as $1,000 as part of a larger funding round.

A system called syndicate funding, which allows professional angel investors and crowd investors to get into a deal together, has been growing in Europe, according to Forbes. However, since angel and venture firms use the term “syndicate funding” to indicate fill-in investors around a fund’s offering, there’s no stock definition of it, says Jeff Sohl, director of the Center for Venture Research at the University of New Hampshire.

The term can also refer to “accredited” investors who are lining up people on a site such as AngelList to go in with them on a deal. “There are some very active syndicates emerging,” says Richard Swart, a specialist in crowdfunding and research director at the Fung Institute for Engineering Leadership at the University of California-Berkeley.

“That’s a very interesting development that no one expected to happen nearly this fast,” he says. “In angel investing, it’s very common now to see three or four or five angel groups co-invest on a deal. We didn’t think it would happen this quickly in crowdfunding.”

Pros and Cons

For entrepreneurs, crowdfunding models offer some good, some bad and some potentially ugly tradeoffs, say Sohl and Swart.

Besides all that, Sohl worries that crowdfunding will be really hot for about five years. Then, because of the high level of risk and the illiquidity of investments – there’s no payoff unless there’s an exit – a rash of lawsuits will follow.