Tag Archives: equity capital

Update on Crowdfunding

I posted an article last fall explaining the new type of Crowdfunding coming as a result of the Jumpstart Our Business Startups (JOBS) Act that became law on April 5, 2012.

I said in that post that I would keep you up to date on the progress of the Securities and Exchange Commission (SEC) as they developed the rules and regulations that would put the Crowdfunding section of the JOBS Act into practice.

Here is what has happened since the passage of this law over a year ago:

Empty Boardroom

 

 

           NOTHING!

 

 

Crowdfunding is still limited to “accredited” investors, or donations, only. Non-accredited investors still cannot invest directly into non-public small businesses. (See my article of Nov. 19,2012 for an explanation of “accredited” investors.)

Interestingly, however, there have been dozens of new crowdfunding sites popping up on the Internet in anticipation of the release of the SEC regulations.

There are far too many of them to list here, so I suggest you connect with this website that maintains a list of current crowdfunding sites. New sites are popping up daily, so be sure to check the list periodically.

Some sites have estimated that there may be around 1,000 crowdfunding sites available by the time the SEC releases their regulations.

Of course, these estimates usually combine all the Peer-to-peer sites, lending sites, equity sites, donation sites, and non-profit sites that are coming online.

Have any of you tried crowdfunding? What was your experience like?

*

 

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.