This could be the year that crowdfunding becomes a realistic option for more small business and startups.
That was one of the chief goals of the Jumpstart Our Business Startups Act when it was enacted in April 2012. The law was designed to help those companies raise relatively small amounts of money online without triggering some of the Securities Exchange Act’s more burdensome reporting requirements.
Unlike a crowdfunding campaign on Kickstarter or Indiegogo—where a user might donate money to a project and get a T-shirt or some other gift in return—small businesses and startups would be selling equity in their ventures.
“You could potentially hit a very large number of investors in a fairly simplistic, easy delivery method,” said Jack Bowling, a partner with the Stinson Leonard Street law firm and an expert in venture capital and emerging companies.
Though the law is not quite two years old, most investors and issuers have been forced to wait for the Securities and Exchange Commission to lay out specific rules governing how equity crowdfunding would work. In late October, the commission detailed its proposal.
The Proposed Rules
In a 12-month period, a company could raise a maximum of $1 million via crowdfunding. Businesses that are already SEC-reporting companies would not be allowed to raise money this way.
If an investor’s annual income and net worth are less than $100,000, they could invest a maximum of $2,000 or 5 percent
of their annual income or net worth, whichever is greater.
If an investor’s annual income or net worth is $100,000 or higher, that person could invest up to 10 percent of their annual income or net worth, whichever is greater. This class of investors, though, could not invest more than $100,000 via crowdfunding in a 12-month period.
Investors wouldn’t be able to sell any securities acquired through crowdfunding until a year had passed.
Equity crowdfunding could only take place online via a funding portal or a broker-dealer registered with the SEC. Those online platforms would have to meet a series of requirements, including offering educational materials to investors, and abide by several restrictions, such as not offering recommendations or advice to investors.
What Investors, Entrepreneurs Think
Those rules have been open for public comment for the past three months, and that period just closed on Feb. 3. The SEC will have to decide how—or if—to update the rules to reflect any suggestions or criticism. Dozens of entrepreneurs, investors and other entities have weighed in.
The Small Business Administration’s Office of Advocacy, for one, filed a letter in January arguing the SEC’s proposal doesn’t accurately describe the costs that small companies would face.
For example, the Office of Advocacy noted, if an issuing company is trying to raise more than $500,000, it would be required to provide audited financial statements. Such an expense might be much greater than most startups could afford.
Despite the criticism, many commentators believe the SEC’s proposal is a step in the right direction, Bowling said.
“If you’re looking to raise a relatively small amount of money, and you don’t have readily accessible capital sources, this is a pretty easy way to do it.”
