Are you a small business or a startup? Have you considered crowdfunding?
Wed, 06/04/2014 - 5:46am | by Helen Hoart
You’ve probably heard about crowdsourcing. You know: tapping into the collective wisdom of your network to find an answer or solve a problem or the ultimate in crowdsourcing—Wikipedia. Now here’s another twist—crowdfunding.
Thanks to a new law –the Jumpstart Our Business Startups (JOBS) Act, small businesses and startups will have easier access to investment capital. The law allows businesses to seek small investments from many individuals by using equity crowdfunding.
The concept of crowdfunding isn’t new. Until now small businesses or startups could seek investors, using what is sometimes called “token” crowdfunding, primarily using social media and the internet to seek small investments from many investors. The catch was with “token” crowdfunding these investments could not be profit-making. Rather the business or startup would offer a “token” thank you for the investment. For example a filmmaker seeking funding would give “investors” a copy of the film. Now that the law has changed, these crowdfunding investments can be profit-making.
There are some limits. The investments can total no more $1 million in any 12-month period but the new law waives the requirement for doing a public offering. Waiving the requirement for small businesses to do a public offering is important because public offerings can cost thousands of dollars.
A company can only sell to investors through a middleman—either a broker or Investment Crowdfunding Portal that is registered with the SEC.
Even though the JOBS Act was passed by Congress and signed into law in the spring the opportunity to seek crowdfunding won’t go into effect until 2013 because regulatory agencies must write the regulations governing the new law. To that end the SEC took a first step by proposing regulations allowing companies to publicize private placements. To learn more about this see The SEC and the JOBS Act: A Big First Step. The new proposals promise to open up capital flows from investors who would otherwise have been unaware of most private offerings.
Just as the name of the law suggests the aim is to open up more opportunities for capital to flow into startups and small businesses. That, in turn, will help grow new companies and create new jobs.
And it's a win for the small investor, who up until now wasn't able to invest in dynamic new businesses.