Professors, politicians, and prognosticators have—for years—implored the black community to “take all the money you spend on clothes, shoes, and hair, and put it into investing or starting a business.” Equity crowdfunding provides a new opportunity do so.

Many statements about black consumerism are based on a flawed premise. Black people are starting businesses. In fact, African Americans are more likely to start a business than any other community in the United States Black millennials are even more interested in entrepreneurship than past generations, and black women are the fastest growing group of U.S. business owners in the past 20 years.

As the U.S. rate of entrepreneurship has declined in the past 30 years, entrepreneurial activity in the African American community has increased. The problem is access to capital. Black entrepreneurs start businesses, but—often—do not have access to the capital necessary to market and grow those businesses over time.

Barriers to Business Investing

Prior to equity crowdfunding, most African Americans couldn’t invest in hot, new companies serving the market, such as Mayvenn, YeKim, or Lonzo Ball’s Big Baller Brand, even if they wanted to; regulations prevented it. More importantly, most black entrepreneurs could not turn to friends or family to invest in their small businesses. Not anymore.

Equity crowdfunding empowers anyone in the United States over 18 to invest in startups in amounts as small as $10. Prior to President Obama signing the JOBS Act into law, this privilege was restricted to wealthy accredited investors; about 10% of U.S. households. Risk comes with investing, but unleashing $1.2 trillion in black buying power to fund black businesses and real-estate endeavors is one of the greatest wealth building opportunities ever made available to the African American community.

African Americans have historically been frozen out of wealth building opportunities necessary to build generational wealth. Usually, when wealth building opportunities have been made available, it was only after other communities had access. This makes equity crowdfunding almost singularly unique in American history.

The community has found innovative ways to work around the problem in the past, with a mix of personal loans and informal business groups filling the void. One creative way is sou-sou organizations made popular by women in West Africa and the Caribbean.

Now, black investors and entrepreneurs have access from the beginning and can share in the economic gains made by startups growing and hiring. Moreover, black consumers—trendsetters—can use their dollars and influential platform to select which products, services, and solutions get funded from the beginning.

In an effort to better understand the opportunity, I have interviewed black founders running equity crowdfunding campaigns, including Jetpack CEO Fatima Dicko and WhoseYourLandlord CEO Ofo Ezeugwu. I have also interviewed truCrowd Illinois CEO Florence Hardy, one of the only black, brown, or female executives running an equity crowdfunding platform.

The stories of these founders are inspiring and informative. However, more background is needed to fully understand the opportunity, risks, and outlook.

How Equity Crowdfunding Works

Entrepreneurs connect with an equity crowdfunding platform that agrees to host their campaign. Some platforms include; WeFunder, Bolstr, SeedInvest, Republic, and MicroVentures.

Those who want to fund their own businesses file an “offering statement” with the U.S. Securities and Exchange Commission (SEC) declaring their intent to raise money.

Investment minimums vary, some entrepreneurs take the “small dollar” approach, working to collect as many small investments as possible; as small as $10. Others, like WhoseYourLandlord CEO Ofo Ezeugwu, prefer to set a higher minimum, say $500, to ensure investors make a real commitment.

In most cases, the following investment options are available for investors and entrepreneurs:

SAFE (Simple Agreement for Future Equity) 

The SAFE is a financial instrument that gives investors the right to obtain equity in a startup if/when that company sells shares at a future date. This usually happens when a startup raises money from an “institutional investor” that sets a value for the company. However, shares could also be sold if the company is acquired. The SAFE rewards investors (you) for investing early by allowing investors to purchase shares at a cheaper price by using a Valuation Cap and/or Discount Rate. More here.

Convertible Note

The Convertible Note is an unsecured loan. Similar to the SAFE, the ‘loan’ amount converts to equity at a future date. Although the loan is rarely repaid in cash, similar to traditional loans, the Convertible Note has an interest rate and maturation date. If the startup does not raise another round of funding, the loan amount is due on the maturation date. The interest on the loan accrues and can be paid in cash or added to the Note amount to be converted into equity. Similar to the SAFE, Convertible Notes use a Valuation Cap and/or Discount Rate to reward early investors. More here.

Stock

Some startups decide to offer stock at the seed stage. Stock offerings provide investors with shares of preferred stock based on a Pre-Money Valuation or Post-Money Valuation. Pre-Money Valuation sets a value for the company prior to investment. Post-Money Valuation sets a value for the company after the investment.

Debt / Revenue Agreement 

Some equity crowdfunding platforms offer more traditional loan options that provide startups with loans that are paid back based on terms in the Promissory Note. If the startup company has revenue, the loan may be paid back using revenue; often on a monthly or quarterly basis. If the company does not have revenue, the loan amount is due at the maturation date.

Perks

Perk Agreements were made popular on rewards-based crowdfunding sites like Kickstarter. Very often, startups raising money via equity crowdfunding will offer products, discounts, or other perks in addition to equity in the company. Perk Agreements are offered in combination with other investment options presented here.

eREIT 

The JOBS Act also empowers non-accredited investors to invest in income-producing real estate opportunities without going through a broker. Real Estate Investment Trusts (REITs) have existed for years. eREITs and other new real estate investment products allow investors to invest as little as $500 in local/national real estate projects. More here.

The terms of these investment options are set by the entrepreneur running the campaign.
At the federal level, Regulation CF Crowdfunding allows entrepreneurs to raise up to $1M/year with 2,000 investors per campaign; 2,000 investors x $500 = $1M (Regulation D and A+ Crowdfunding have different standards for real estate and more mature companies, and/or accredited investors. Some states also allow entrepreneurs to raise a little more.

For Investors:

Equity crowdfunding increased the pool of eligible investors in the U.S. by at least 230 million people. Most equity crowdfunding campaigns are run when companies are young, during a company’s seed investment round. Investors in equity crowdfunding campaigns mostly fill the role of angel investors. They invest after the company has some traction, but while the startup is still young.

To get started, prospective investors (you) begin by setting up an account on an equity crowdfunding platform. After setting up an account, review the startups currently running campaigns. Pay close attention to the startup’s disclosures and offering terms.

For national campaigns, most investors making $100,000, may invest $2,200 across all securities offered under Regulation CF per year. If the investor’s annual income and net worth are at least $107,000, then an investor may invest the lesser of 10% of their annual income or 10% of their net worth.

Investors may invest up to $107,000 in any 12-month period using new equity crowdfunding rules. Some states have more progressive regulations allowing investors to put $5,000 into startups using equity crowdfunding.

All investments have risks, and while the potential economic upside of an early equity position in a hot startup is significant, investors can lose their investment. Equity crowdfunding isn’t a get rich quick scheme, it’s a wealth-building opportunity. Debt and revenue sharing investment options, and some real estate opportunities can provide monthly income for investors. However, the biggest gains to be made will be seen in years, not months.

For Entrepreneurs

Jetpack CEO Fatima Dicko, who, to date, has raised $230K from over 700 investors on equity crowdfunding platform Republic, sums up the potential for startups using equity crowdfunding like this: “allowing people who would actually use the product to invest in our company.”

Converting fans and consumers into investors is the key for entrepreneurs interested in running equity crowdfunding campaigns. Entrepreneurs should first decide that equity crowdfunding is right for their business. Analyzing the investment options and the amount that may be raised is a good place to start. The amount to be raised must be declared at the beginning.

Startups running equity crowdfunding campaigns must disclose a significant amount of financial information. This is necessary for investors to make informed decisions. This information will be made publicly available on the crowdfunding platform during the life of the campaign.

After starting a campaign, creating content that compels fans and consumers to invest is critical. Startup founders and their teams will spend a significant amount of time creating marketing products, pitching stories to journalists, and answering questions from potential investors.

Because so much time will be spent creating marketing products, many startup founders decide to run parallel fundraising campaigns using the traditional pool of accredited investors. If an equity crowdfunding campaign is going well, founders can point to the traction received when pitching angel investors, and, eventually, institutional venture capitalists.

Equity crowdfunding campaigns require a significant amount of time to launch and run. Entrepreneurs should do a cost/benefit analysis. If a campaign is not successful, entrepreneurs face a public failure that may impact the company in the future. However, for many black/brown entrepreneurs that lack other options, equity crowdfunding presents a significant new opportunity to fund a business.

Equity crowdfunding brings the positive impact of entrepreneurship, investing, and wealth creation closer to being realized at scale. PartPic, a black-owned business in Atlanta, used an equity crowdfunding campaign on SeedInvest to jump-start a $1.5 million seed round of funding, grow the business, and was acquired by Amazon. 

Success like this requires effort—investors must analyze investment options and entrepreneurs must create compelling campaigns. The reward for that effort is, for the first time, mothers and fathers investing in a daughter’s business, influence on which products make it to market, and unleashing black buying power to build wealth.