Crowdfunding sites prepare for equity-based investments

“Military members are not going to get as much service from the [donation] process because the type of businesses they have aren’t built for that. They don’t have as many products,” he said.

Perks-based donations tend to be much more useful for people creating discrete projects, whereas businesses can better use equity investment, Terrell said. He expects significantly more traffic to his site once equity investments are allowed.

President Obama signed the JOBS Act in April 2012. The SEC is scheduled to deliver rules surrounding the crowdfunding provision by the end of the year. (Alex Wong/GETTY IMAGES)

In Terrell’s experience, the ratio of business to product pitches is about 80 to 20 percent.

“There is no lack of veteran entrepreneurs, but there is a shortage of the ones who have a real product,” he said.

Instead of developing a perks-based model, crowdfunder is using the interim period to lay the foundations for social networks before it plunges into equity-based crowdfunding.

While waiting for the regulations, startups are using the platform to raise social capital — or building and accumulating personal relationships— which could eventually lead to investments. Crowdfunder has registered 8,000 investors with $17 billion in potential investment capability and 4,000 founders with specific fundraising goals — these investors and founders are encouraged to connect with each other before the regulations are released. Both investors and founders can make profiles based on their interests, fundraising goals and ideas.

Chief Strategy Officer DJ Paul has been meeting with the SEC and is on the board of the trade assocations Crowdfund Intermediary Regulatory Advocates and the Crowd-funding Professional Association. Having interacted with other nascent crowdfunding platforms, Paul noticed that many don’t consider crowdfunding to be as closely tied with the securities industry as it actually is, he said. Some also may not have fully considered the costs of operating as an intermediary, which involves a lot of compliance-related expenses.

Unsuccessful platforms will likely fail because of a “cultural problem”, he predicted. Some people — mostly from the East Coast — are entering the crowdfunding industry from a securities background, while many more — mostly from the West Coast — come from the tech world. The most successful crowdfunding intermediaries, he says, will be the “happy marriage of those cultures – most are in one side or the other of those cultures.”

Though funding portals like crowdfunder are explicitly forbidden from giving out investment advice, another factor determining a platform’s success will be the ability of users to share investment advice with each other, said chief executive Chance Barnett.

“The direction of crowdfunding is hinged on people’s physical networks, not virtual ones” — because people are likely to support the businesses of people they know and trust, Barnett predicts.