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December 16, 2017

Crowdfunding and Capital Gains through NET CAPITAL


Finally, we are seeing more than a dozen crowdfunding websites where the crowd can make money.  Under Title III of the JOBS Act, which launched this year, a FINRA approved and SEC registered crowdfunding website can act as an intermediary and offer for sale securities in early-stage companies.  Instead of doing Kickstarter, where you are merely making a contribution to a good idea, some nice people, or your next-door neighbor, the crowd can now participate in the upside, by buying stock in a start-up.  Equity-based crowdfunding has tremendous appeal.  You help a start-up, and you have a chance for a capital gain.

It was unheard of years ago, but under an exemption of Section 4(a)(6) of the Securities Act, individuals, like you and me, who are not accredited investors, can buy stock in a private placement that is exempt from the registration requirements of the Securities and Exchange Commission (the “SEC”).  And we can buy it online, through a crowdfunding portal.

I especially like the portal at https://netcapital.com.

It is an easy-to-navigate website, and for a $100 minimum purchase, you can buy stock in a 3D jewelry company, that allows its customers to design and make their own custom products.  Or they will design the custom jewelry for their customers.  They have sales, scalable software, and now, because of this new SEC exemption, we the people of the crowd can buy shares of stock of this company and get in on the ground floor.

We can also buy stock in a dress shirt manufacturer that makes clothes that don’t show your sweat.  This company is in Michigan, and has a stud player from the Detroit Tigers using their product.  That’s good!  They have revenues, repeat customers and vision, and they are hoping that they can raise money from the crowd.

I much prefer backing an entrepreneur when I can participate in the upside.  And you know what?  If the business fails, at least I have a tax write off for a capital loss.  But maybe I get a ten-bagger.  Now the crowd can invest in the next Google, and do it online.  The disclosures that these companies are required to post on a crowdfunding site are substantial, so not just any new business can sell stock under the 4(a)(6) exemption.  The company must be real, be incorporated and have a real plan.  The crowd is given a level-playing field on the portal to view the early-stage company.

This idea will change the way start-ups raise capital, and perhaps will make these crowdfunding portals extremely valuable.  I wonder if we can buy shares of a crowdfunding portal itself?  That may be an interesting way to benefit from all the early-stage companies.

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