What Is Crowdfunding For?

Kickstarter and Indiegogo are responding very differently to new rules that allow small-time investors buy equity in startups.

Misfit, a wearable-technology company, found success selling fitness trackers (pictured here) on Indiegogo. The company was recently acquired by the watchmaker Fossil for $260 million. (Misfit)

Back in October, the U.S. Securities and Exchange Commission approved a new set of rules that will allow entrepreneurs to use crowdfunding sites to raise capital. The kinds of crowdfunding campaigns that have become popular in the past decade—the cult-classic movies, the rare beers, the frivolous potato salads—have solicited what were essentially donations. Departing from those, these new rules will allow startups to distribute equity, not just perks, to just about anyone who wants to invest.

While the SEC will restrict those with an income or net worth of less than $100,000 to investing at most $2,000 each year, that’s still a lot of capital to go around, and some have lauded this as “Crowdfunding 2.0.” But when these new SEC rules, which are expected to take effect early next year, kick in the two biggest names in crowdfunding will be diverging: While Indiegogo is prepping for a horde of eager entrepreneurs and investors, Kickstarter is not.

“We’re pretty public about the fact that that we aren’t going to allow equity crowd investing on Kickstarter,” said Justin Kazmark, a spokesperson for the company. “Our mission is to bring creative projects to life—that’s our focus. Jumping into equity investing doesn't advance that mission." This year, Kickstarter reincorporated as a public-benefit corporation—a legal designation indicating that one of the company’s primary aims will be in the name of the public good. Besides, Kazmark says that the type of projects Kickstarter attracts probably wouldn’t make the best investments. “I don’t think the purpose of creativity is to be an investment vehicle,” he says.

Indiegogo, on the other hand, believes that startup investments fit its mission. “We see this as another component of democratizing funding,” says Slava Rubin, Indiegogo’s founder and CEO, of the new SEC rules, adding “[It] is really a huge win for America and is really a great opportunity for everyone to get involved with funding their neighbors or some great new idea that they want to see come to life.”

Rubin says that both those running and those backing Indiegogo campaigns have said they want small-time investors to be able to buy stakes in startups, particularly based on some projects’ success in the past. This year, Misfit, a wearable-technology company that got its start on Indiegogo, was acquired by Fossil for $260 million, and Rubin says it’s campaigns like that that get backers excited in investing.

Both Kickstarter and Indiegogo have raised huge amounts of money since they were founded, linking billions of dollars from millions of people with tens of thousands of projects. This divergence in equity crowdfunding is bound to set the two rival companies further apart. In the past, the two sites have been separated by their success rates (Kickstarter’s is higher) and funding rules (Indiegogo’s are more lax). While Kickstarter stuck to its mission of only allowing campaigns with a creative bent, Indiegogo launched a new site this year, called Generosity, that is geared toward individuals asking for financial assistance.

While it remains to be seen just how many Americans will actually be interested in purchasing stakes in high-risk, high-reward companies, the marketplace is looking to be plenty crowded as other sites that previously were open only to accredited investors start to allow smaller investments too—even if Kickstarter is opting out.