The Oculus Rift has become a leading example of the crowdfunding movement.
Through a successful campaign, nearly 10,000 backers contributed $2.4 million, helping to advance the virtual reality headset from a basic prototype to a commercially viable product. The attention it garnered led to Facebook CEO Mark Zuckerberg acquiring the startup behind the device for an astounding $2 billion. This marked a significant moment for Oculus and the broader landscape of virtual reality, also shining a light on crowdfunding, as it became the first project of its kind to sell for such a high price.
However, the backers felt let down following the Facebook acquisition. They weren’t investors in the true sense; federal regulations at the time prohibited such arrangements on crowdfunding platforms. As a notable early supporter, Markus Persson, the creator of Minecraft, expressed his disappointment, stating he didn’t contribute funds to facilitate a first investment round for a big tech takeover.
Currently, disappointed backers have no recourse. Yet, in the future, as new groundbreaking projects emerge on crowdfunding platforms, supporters may actually hope for major buyouts by large companies like Facebook, Google, or Apple. This change is anticipated due to upcoming SEC regulations that may allow contributors to receive equity in exchange for their support. The JOBS Act, passed in 2012—before the Oculus Rift even existed as a crowdfunding initiative—authorized this concept. However, the necessary guidelines have yet to be finalized. In February, just prior to the Oculus acquisition, the SEC was still gathering public feedback on extensive proposed regulations.
SEC Chairman Mary Jo White has declared crowdfunding a key priority for 2014, indicating that by next year, final rules could be established, paving the way for equity crowdfunding platforms like Alphaworks or Fundable. Engaging with these platforms will be more complex than conventional donation-based systems. The new regulations will come with stricter requirements, especially for smaller equity investments, which serve to protect investors from being misled by promises of substantial returns. Nevertheless, future contributors may have an opportunity to secure shares in innovative ventures.
### Funding Portals
Investment opportunities won’t be available on just any website. Platforms aiming to offer investment options like traditional crowdfunding sites will need to register with both the SEC and the Financial Industry Regulatory Authority. These so-called “funding portals” will be prohibited from giving investment advice or managing investor funds. Additionally, they will not be able to remove individual projects since this could be interpreted as providing investment advice. Most differentiation will come from listing fees or targeting specific market niches.
### The Campaign Cap
Each startup will have an annual limit of $1 million for crowdfunding, a figure easily surpassed by the most successful projects on traditional platforms. However, these startups can still seek unlimited funding from venture capitalists and can also go public, raising funds on the stock market.
### The Personal Cap
There will be a cap on how much individuals can invest in equity crowdfunding campaigns annually, but the proposed limits are relatively generous. Individuals with a net worth or income of $100,000 can invest up to 10% of whichever amount is greater. Even those with lower financial standing can contribute a minimum of $2,000 annually. While there’s a cap of $100,000 on individual yearly investments, for seasoned investors, this threshold may be minimal. Notably, verifying financial details won’t be compulsory, as investors will simply need to indicate compliance with the limits.
### The Launch Plan
Creators of crowdfunding projects won’t be required to present a comprehensive business plan. Instead, the SEC will ask for a general overview of the project, including descriptions, business models, the targeted fundraising amount, timeframes, and contingency plans for exceeding funding goals.
### Financial Disclosures
Startups seeking significant funding (over $500,000) must submit their latest tax returns and two years of audited financial statements. Lesser campaigns will require similar documents but with less stringent review: campaigns between $100,000 and $500,000 can submit their numbers from a CPA, while those under $100,000 need only internal certification.
Startups will also need to disclose their debt and ownership structure to help potential investors understand their equity stakes and potential risks. Additionally, names and resumes of company officers and directors must be provided, documenting their backgrounds for at least the past three years.
### Only on the Web
With few exceptions for local projects, campaigns will be limited to a single funding portal, and all investments must be conducted online. This means there’s no risk of being pressured in person by aggressive sales tactics, as is common in some investment schemes.
### The Termination Report
After successfully obtaining funds, startups are required to submit reports to the SEC annually, updating their financial and operational status until they file a “termination report,” indicating all shares have been sold or the business has ceased operations.
### Get Ready to Lose Money
While there’s potential to back the next groundbreaking project, the reality is many investors might face average returns or even losses, especially considering the associated costs and requirements of equity crowdfunding that may outweigh possible gains. It’s advisable only to invest what you can afford to lose, whereas more significant investments could be better placed in lower-fee mutual funds. However, that approach may lack the excitement of supporting innovative projects.