Equity Crowdfunding to Escape Poverty

Recently, the United States Securities and Exchange Commission adopted new rules that will open up crowdfunding equity investments to anyone.

Previously such investments had only been accessible to so-called accredited investors – individuals with a net worth of over $1 million or annual income of over $200,000. These investments will still be restricted in terms of the amount any individual can invest, but the bottom line is that now anyone, despite their net worth or income, will be allowed to invest directly in a non-publicly traded companies in the US.

This is a potentially big shift from the typical crowdfunding model in which an individual contributes to a project in exchange for some sort of non-financial reward, such as an advance copy of a product. Under that model, the backer gets a reward they are interested in at a price they are willing to pay, while the project owners get the seed funding to make their vision a reality.

The benefit to the backer is one-off, while the benefit to the project owner can potentially grow over time depending on the success of their efforts. Equity crowdfunding is different in that it allows backers a share of that future growth. Of course, equity crowdfunding is not without its detractors who worry about failed ventures and fraud, but then again, those same risks exist in typical crowdfunding as well.

While it will be interesting to see how equity crowdfunding unfolds in the US, what really interests me is whether equity crowdfunding can be used to both spur innovation and lift people out of poverty in emerging markets. The idea of using crowdfunding for development is nothing new.

A couple of years back, the World Bank’s infoDev program released a report titled Crowdfunding’s Potential for the Developing World. They also piloted a Crowdfund Investing Pilot in Kenya that supported six startups to crowdfund, although they steered clear of equity crowdfunding due to an undisclosed potential legal risk to the pilot.

Imagine though a scenario where an entrepreneur could bring, for instance, a low-cost renewable energy solution or an improved sanitation service to market with the support of backers who would not only be purchasing that product but also buying a small piece of equity in the firm.

By combining rewards-based crowdfunding with micro-equity crowdfunding, backers would have a vested interest, however small, in the success of that product. This would mean that in addition to having received a new product or service that improves their lives, they would also receive ongoing financial benefits as the firm grows. The combination of access to live improving products and new income streams could further accelerate their pathway out of poverty. See this article for more.

Making this a reality is not without its challenges. For one, there are the potential regulatory and legal barriers that may exist in certain countries, which would have to first be addressed. Paying out such small dividends would also likely not be cost effective in cash, although as access to digital financial services grow in emerging markets, it would become much more feasible.

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