Crowdfunding has a key role in democratizing the investment arena by exposing regular people to new asset markets and by giving small companies new ways to raise necessary capital. Previously, prospective investors may have sought ways to get in on the ground floor of the “next Apple,” but the sizable task of sifting through available data to find such a possibility may have seemed unfeasible. In turn, entrepreneurs may have struggled to raise capital from anyone besides their friends and families. Crowdfunding unifies these eager entities and makes them business partners by combining recent legislation with efficient technology. New businesses accumulate the capital they need by accepting small contributions from many individual investors, while investors can hold stake in an entity without having to pony up five or six-figure offerings for the privilege.

The 2012 ratification of the Jumpstart Our Business Startups Act (JOBS Act) provided preliminary legislation from which crowdfunding would eventually emerge. At its inception, the act removed limitations on raising capital but still presented considerable barriers to all parties. In accordance with Rule 506(b) of Regulation D, an issuer (the entity attempting to raise money) was unable to engage in general solicitation tactics as a means of attracting potential investors. Rule 506(c) of the same regulation—commonly referred to as Title II of the JOBS Act—softened the parameters of the previous rule, but only for marketing targeted at accredited investors. Such investors are defined as having an annual income of $200,000 or more, a net worth of $1 million or more, or an annual household income (among spouses) of $300,000 or more. This provided a new avenue for young companies to reach investors, but only if they had deep pockets.

In 2015, Title III of the JOBS Act (also known as Reg. CF) changed everything by opening the process to non-accredited investors. With the implementation of this new regulation, crowdfunding as we know it was born by removing restrictions on potential investors and by expanding the abilities of issuers to advertise their offerings. Like their accredited counterparts, non-accredited investors may participate in crowdfunding in accordance with their income or net worth. Issuers may only solicit their efforts to non-accredited investors through third-party intermediaries that target any potential investor and provide direct access to a funding portal. These intermediaries usually take the form of investment websites where investors can create cash accounts and initiate transactions with a simple key stroke.

Another subsection of the JOBS Act, Title IV, specifies similar provisions regarding solicitation to accredited or non-accredited investors. Qualified businesses under this regulation may pursue higher levels of capital provided they meet certain requirements. Tier One companies may raise up to $20 million per 12-month period, while Tier Two companies may raise up to $50 million.

Crowdfunding intermediaries are not to be confused with peer-to-peer fundraising websites that offer non-financial returns or no returns at all. Many of these undertakings are donation-based and only provide opportunities for charitable contributions. Contributors may receive small gifts or rewards for their donations, but they’ll never yield equity or other legitimate financial returns. Proper crowdfunding ventures create genuine economic partnerships by offering private equity positions.

Other online platforms, of course, may allow investors to make similar transactions. While the offering company may rely on the JOBS Act for its legal validity, it may not be engaging in crowdfunding according to the Reg. CF definition. The term “crowdfunding” has been used interchangeably for quite some time, so it’s important for potential investors to know what they’re getting involved with. Online intermediaries that allow investments in fractional debt, partial debt, ownership in real estate, or remote ownership of commodities, like hard liquor, are among available options that mimic the crowdfunding process without falling under the same umbrella. Issuers and third-party intermediaries can take the lead in reducing investor confusion by clearly specifying the nature of their offerings. Simple notations of “506(c)” (accredited investors only) or “Reg. CF” (crowdfunding under Title III) might help identify a genuine crowdfunding portal, and clearly specifying the type of asset offered — debt, equity, hard asset, etc., will help prospective investors dial in on their options.

Conventional crowdfunding systems provide partial ownership in a company or entity in a similar manner as publicly-traded stocks. Investors may receive private shares, though sales or exchanges may not be possible for a specified period. Shareholders could also yield a percentage of return in accordance with their original investments should the company be taken public or bought out. For instance, you could contribute $10,000 toward a $1 million crowdfunding effort for a 1 percent stake in the total funding. Should the issuer excel and raise $25 million from an initial public offering (IPO), your original $10,000 could become $250,000 (1 percent of the IPO yield). Such returns may not be typical and would largely depend on the policy of the issuer, but the fundamental idea behind equity crowdfunding holds true: Small investments can generate large returns if you find the right opportunity.

In that regard, crowdfunding creates a platform for financial success that may otherwise be unavailable. Crowdfunding shares this quality with self-directed retirement. As confidence in stocks and other publicly-traded securities continues to waffle, people are exploring new methods for bolstering their IRAs, 401(k)s, health savings accounts (HSAs), and education savings accounts (ESAs). Alternative assets like crowdfunding allow investors to pursue opportunities in markets they choose rather than wait by the stock ticker and hope for the best. Anomalies notwithstanding, the stock market has been around long enough to demonstrate a relationship between risk and return. Alternative assets offer opportunities to personally direct investments and dictate financial progress, even when they’re held in an IRA or 401(k).

Crowdfunding and self-directed retirement plans are giving 21^st century investors opportunities to take control in ways that our parents or grandparents never could. Furthermore, crowdfunding is no different from other alternative assets from the perspective of the Internal Revenue Code. Self-directed retirement account holders can allocate their tax-advantaged dollars toward crowdfunding efforts, at which point the account itself becomes the investor. The IRA will bear the accreditation of the holder, so non-accredited investors would need to seek crowdfunding investments allowable per Title III and Title IV of the JOBS Act.

These two relatively new financial systems complement each other by addressing the needs of modern investors. People want to take the reins and avoid the uncertainty of publicly-traded securities, but the logistics of self-direction may seem daunting. Investors may be concerned about additional paperwork required to incorporate alternative holdings into an IRA or 401(k). Documentation must be specifically titled in the name of the account and self-dealing activities must be avoided to remain in IRS compliance. Self-directed investors may worry that alternative investments in tax-advantaged accounts will garner special IRS scrutiny because of these added factors, but a knowledgeable and education-based retirement administrator can provide the guidance necessary to avoid the manifestation of these concerns.

Fees are another major consideration regardless of whether investors are using personal money or retirement money. Crowdfunding can offer a substantial advantage in this department if intermediaries provide a beneficial framework to investors. Online platforms may retain, from the issuer, a percentage of the total funding amount depending on whether the company met their goal and leave earnings yielded by investors alone. Others may collect transaction fees from investors or possibly assess charges to both investors and issuers. Naturally, such platforms may have a hard time generating traffic on their sites.

Incorporating crowdfunding into a retirement account will involve fees assessed by the IRA provider in exchange for their services. Such fees may deter investors from participating in crowdfunding with their IRAs or 401(k)s. Unlike providers that charge percentage-based fees, self-directed retirement providers tend to employ a flat or asset-based fee structure. These schedules may assess fees on a per-asset, per-value, or asset-specific basis and may prove financially impractical to the smaller investors that crowdfunding attracts. A $25 investor and a $25-million investor will require comparable administrative services from transaction, tax reporting and data security standpoints, so they will likely pay similar fees despite the broad difference in their earning potentials.

The development of technological platforms has played a significant role in bringing the convenience and egalitarianism of crowdfunding to self-directed investing. Portals that allow 24/7 client access and online transaction initiation help optimize the process for executing investments. Web-based transactions can eliminate the stress of completing tedious paperwork, and technological safeguards continue to ensure the security of sensitive information when conducting business online. More effective systems lead to better accounting practices, so accurate reporting to the IRS is easier than ever. The relationship between small investors and large fees may also be a thing of the past as more efficient processes with reduced manpower requirements allow self-directed retirement providers to lower their fees.

The marketplace for new financial opportunities continues to grow and technology continues to provide streamlined access between investors and the up-and-coming companies that crowdfunding supports. Individuals can test the waters of crowdfunding with relative ease, all while utilizing the tax advantages of self-directed retirement plans. There may always be a place for Wall Street strategies, but hands-on wealth creation through alternative assets is certainly the wave of the future.