Equity Crowdfunding Coming! (?)

Crowdfunding—where anyone can list their special project or business on one of the crowdfunding websites and ask for “donations” in exchange for simple “rewards”— has exploded in recent years (524% per year).

But with funding limited to only donations and minor gifts, or “rewards,” it is nearly impossible to raise money for starting a business, conducting a very large project, or completing a serious expansion.

A major impediment to real funding for small businesses and projects is the Securities Act of 1933, which currently does not allow a business to offer for sale any equity of their business without registration with the U.S. Securities Exchange Commission (SEC), which is extremely expensive—or, by going through Venture Capitalists, or “accredited” Angel Investors.

An “accredited” investor is anyone making over $200,000 in each of the prior two years, or has a net worth over $1 million (excluding their home). This is only about 1% of the general population. (Interestingly, this is also the same group that President Obama wants to raise taxes on.)

However, all of that is supposed to change as a result of the Jumpstart Our Business Startups (JOBS) Act that became law on April 5, 2012.

This new law allows anyone to buy equity in a small business without having “accredited” status as an investor—with limitations. Under this new law, anyone with an income under $100,000 is allowed to take a maximum of a 5% interest per year—or a 10% interest for those who make over $100,000 per year.

The business is also limited to raising $1 million per year in this manner.

Sadly, the U.S. is far behind the rest of the world in the way we fund small businesses. For example: in the U.K. they not only openly allow equity crowdfunding, but they have the Enterprise Investment Scheme where anyone can invest in a non-registered business, or startup.

The U.K. even goes one step further by allowing income tax relief up to 30% of the amount invested when investing between £500 and £1 million. Quite a difference from the U.S. stand on investing in small business.

As you would expect here in the U.S., there are also opponents of the new law who are concerned that these new investments are too risky for the average American.

Of course, these same people totally ignore the unregulated lotteries that raise about $45 Billion ($150 per American household) annually—with odds of winning at about one in 175 million.

Apparently, it is o.k. for a person to spend all their income buying lottery tickets, but they are not allowed to invest in a small business.

Unfortunately, this new crowdfunding resource for equity capital won’t be available until after the SEC issues new regulations—and therein lays the problem.

The SEC moves at glacial speed (for example: the Dodd-Frank Act became law in July 2010 and the SEC had a deadline to complete the regulations by April 2011—and they are not done yet).

A greater fear is that when the regulations are completed, they will be so onerous that many small businesses will still not have ready access to equity capital. The SEC might just kill the attractiveness of the entire program.

It appears to me that heads should roll at the SEC, but in the meantime, if your business is looking (now, or possibly in the future) for equity capital, I suggest you contact your Congressman and Senator asking them to build a fire under the SEC—that you need equity capital to start providing some of the jobs that everyone is saying small business can provide.

Would equity capital, through Crowdfunding, help your business? Let us know if this is an important issue with you.

2 thoughts on “Equity Crowdfunding Coming! (?)

  1. We have an electorate that wants to shut down small business. They raise taxes, they raise the cost of healthcare and now throw an obstacle for expansion funding in the path? Why am I not surprised?

    1. Steve—Thanks for the comment. It is interesting to note that the U.S. is considered to be one of the most difficult nations in the western world for starting a business. The late Anita Roddick said in one of her books that they waited to start The Body Shop in the U.S. until all their other targeted countries were completed—because the U.S. was the most difficult country of all in which to start a business.

      Unfortunately, it appears that our politicians and pundits simply give lip service to the importance of small businesses in America.

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