On Oct. 30th, 2015, the Security and Exchange Commission (SEC) adopted new rules around equity crowdfunding, signifying one of the final steps in fully enacting the Jumpstart Our Business Startups (JOBS) Act, which was signed into law in 2012. The rules went into effect in May 2016.
Today, we’re here to give startup and small business owners the 411 on the rules – being referred to as Regulation Crowdfunding and enacting Title III of the JOBS Act – make possible in terms of fundraising. Then, we’ll share a couple of pros and cons to weigh when deciding whether to capitalize – no pun intended – on this new opportunity.
In short, Regulation Crowdfunding enables companies to raise capital by selling securities through crowdfunding initiatives and for individuals to invest in private companies within certain limits. Crowdfunding is the practice of pooling money for a particular project, initiative, or company from a wide variety of people and sources, typically online.
While like any law the rules are detailed and plentiful, here are the 4 key takeaways you need to know for today:
- Companies can raise up to $1M through online crowdfunding selling equity in a 12-month period – from Non Accredited Investors-;
- Individuals of any income bracket or degree of investment experience can purchase securities online up to a limit as determined by yearly income and net worth (this is designed to limit any one investor from owning too large a portion of a company);
- Companies who choose to sell equity through crowdfunding must file information with the SEC disclosing their activities and financials;
- All equity crowdfunding transactions must be conducted through an intermediary, which was also newly formed by the rules
New avenue for fundraising? Yes. Without potential snags and drawbacks? No.
Here are a couple of pros and cons of Regulation Crowdfunding to consider when deciding whether to crowdfund for your business:
PRO: Companies now have more potential sources of funding, offering more potential flexibility in the funding process.
PRO: Companies can raise money more quickly than if they were to seek VC funding, potentially allowing them to move faster to market than before.
PRO: Companies can potentially benefit from the diverse networks their investors offer.
CON: Due to the legal and compliance protocols companies must follow, seeking funding from a wide variety of individual investors could be burdensome and eat up valuable internal resources.
CON: Companies will now be “answering to” a wide variety of investors, many of whom may have little experience in the investment process and could have expectations that reflect that.
CON: Companies must publicly disclose financial statements, information about how the proceeds are being used, info about the company officers and directors, and more – which means this information would also be available to competitors and investors themselves. Privacy conflict!
If you have any questions about whether equity crowdfunding is right for you, schedule a phone call with one of our experts. We’ll be glad to advise you!