Want to raise money for your new small business or entrepreneurial venture? Until now, it’s seemed easier for a twenty-something techie in San Francisco to raise millions of dollars than an experienced businesswoman in Ohio to raise thousands. Thanks to new equity “crowdfunding” rules that went into effect in May, that situation may have changed.
In the height of the Great Recession, President Barack Obama proposed the “JOBS Act (Jumpstart Our Business Startups), making it easier for small businesses and startups to raise funds. In 2012, Congress enacted the legislation legalizing equity “crowdfunding.”
But it’s taken until May of this year for the regulations regarding equity crowdfunding – officially referred to as “Regulation Crowdfunding” – to go into effect, opening the door for all types of businesses run by all kinds of entrepreneurs to raise funds over the Internet.
Why the hold up? The US Securities and Exchange Commission (SEC) wanted to protect investors from fraud as well as keeping unsophisticated investors from losing significant sums in risky ventures.
One brief explanation is due here. There are generally two types of crowdfunding:
- Equity – in which investors receive a percentage of ownership in return for their funds.
- Non-equity – in which funders receive some sort of reward or benefit.
For the last few years, there’s been an explosion of non-equity crowdfunding projects enabling products as diverse as smart watches (Pebble), coolers (Coolest), and even honey from beehives (FlowHive) to come to market through websites such as Kickstarter and IndieGoGo.
But many entrepreneurs just need money and don’t have a cool product to ship in return. And many investors would rather receive a piece of ownership in a company than an ice maker (Opal Nugget).
If you’re thinking about equity crowdfunding, you first need to keep in mind some of the SEC regulations limiting the manner and amount of funds you can raise.
Some US equity crowdfunding rules:
- Maximum allowed to be raised: $1 million in any 12-month period.
- Limits on how much an individual investor may invest. Amount depends on investor’s income and net worth, generally $2000 for the average investor.
- Must raise equity funds through a SEC registered online portal.
- Must have specific business plan.
- Must be a US company.
- Must disclose specific, detailed information about the company, including information about officers, directors and owners of 20% or more of the company.
- Must disclose detailed financial statements. If raising over $100,000, statements must be reviewed by a CPA. If raising over $500,000, statements must be audited.
- Must file annual reports.
For more information on the SEC crowdfunding rules, check their website: www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm
Since you have to use an online equity crowdfunding portal to raise funds, choose one where investors are likely to be receptive to a business like yours. Check to see what types of businesses and entrepreneurs are generally being funded on these sites.
Also, check out the leadership teams of crowdfunding sites (see the “About Us” tabs on their websites). Look for ones that have diversity of genders, ages, and ethnicities – they’re more likely to attract a broad range of investors and support more diverse types of entrepreneurs.
A few equity crowdfunding portals:
Keep in mind that just because you can raise money through crowdfunding doesn’t mean it’s great for everyone. There are advantages and drawbacks:
Pros:
- Raise funds: You may be able to raise money for businesses that professional investors aren’t interested in.
- Anyone can do it: You don’t need to know or have access to VCs or private investors.
- More control: Since equity is spread around to many small investors, you don’t have to answer to one or two major financial backers.
- Customer engagement: A very successful campaign can drive traffic to your website and create awareness about your company.
Cons:
- Your idea is public: Anyone can see what you’re planning, including potential competitors.
- Limited fundraising rounds: You may not be able to raise more money when needed to grow.
- Unsophisticated investors: Public supporters do not bring the business knowledge, contacts, and financial acumen of professional investors.
- Time: You will only succeed if you run a significant crowdfunding campaign
Equity crowdfunding has now arrived, ushering in a new era of startup and small business financing, making it easier than ever (one hopes) for anyone to launch a business.
Copyright, Rhonda Abrams, 2016
This article originally ran in USA Today on August 10, 2016