You’ve got an idea for a film more brilliant than any Hollywood director has thought of. You’ve asked Uncle Hector, Aunty Mable and Cousin Jerry to support you but they’re not too interested, having heard your grand ideas before! Your bank lacks your vision and you lack the finance. Do you strip yourself of a possible Golden Globe and give up on your idea?
NOT. SO. FAST.
Many business plans are rejected and finding finance for ventures has become as difficult as locating the Holy Grail. However, social media is changing more the way we market and communicate. It’s also changing the way we raise capital. With the economic downturn, now more than ever, the community is reaching out to a new pool of investors who are interested in ‘equity based crowdfunding.’ These crowdfunding schemes will allow businesses and entrepreneurs to bring their ideas to fruition.
The Good News
The advantages of crowdfunding have not gone unnoticed. President Obama has foreseen their ability to become a worthwhile vehicle for investment and a great asset to the US economy, particularly during a time of recession and unemployment. Previously, crowdfunding has operated only on ‘donation funding’ but soon equity based models of funding will become legal under the Jumpstart Our Business Startups (JOBS) Act. This Act, passed in the Spring of 2012, is designed (in part) to create a crowdfunding exemption to the presently existing Securities Act 1933, allowing for a model of equity based crowdfunding to be introduced.
Under the current SEC legislation, ‘entities cannot offer or sell securities to the public unless the offering is registered with the SEC or there is an available exemption from registration.’ There are onerous registration requirements that involve expensive assistance from accountants, lawyers and investments bankers. Many small businesses simply cannot afford these elaborate registration requirements and therefore ventures fail on start up.
Under the new Title III of the Jobs Act, a special exemption for crowdfunding ventures will be created to allow the general public to receive company equity in exchange for funding. This means that businesses seeking less than $1 million will be able to raise capital online from small investors. This spells great news for innovative entrepreneurs and gives investors the ability to be involved in small businesses and projects that they believe in.
The SEC has also proposed to end prohibition against general solicitation which will allow crowdfunders to actively use social media websites to advertise their projects freely. As social media is an important part to the success of these types of projects, this proposal will further assist the success of crowdfunding ventures.
The Bad News
There has been a delay in creating these crowdfunding provisions, which were due for release in January 2012. The exemptions will not be available until the SEC finishes issuing regulations safeguarding their operation. This may not occur now until 2014. The SEC has a tough task ahead of them as many of the crowdfunding sites are refusing to offer any information to assist them, not wanting to release their trade secrets.
Until these regulations are agreed upon, the crowdfunding platform may not legally exist as an equity based model without a licensed broker dealer or accredited investor on board.
So how can you raise funds?
Although there is no equity crowdfunding exemptions available as of yet, you are still not out of luck when it comes to raising funds for your venture. You can still operate rewards-based crowdfunding where ventures offer gifts to pledges in exchange for minor funding.
You can also still access equity crowdfunding despite these provisions not being in place, by offering securities to accredited investors and establishing relationship with registered broker dealers. These platforms are legitimate, abide by current guidelines and raise large amounts of money for aspiring entrepreneurs.
How does it work for Investors?
Securities are offered through registered broker deals and the crowdfunders act solely as intermediaries. Only accredited investors may invest. To be an accredited investor, one must:
- Be an individual earning more than $200,000/year or have a joint income of $300,000
- Have a net worth exceeding $1 million, individually or jointly with a spouse
- Be a general partner, executive officer or director for the issuer of a security being offered
How does it work for companies?
In order to apply to one of the crowdfunding platforms you must supply the following to an accredited investor:
- Executive Summary
- Term Sheet
- Investor Presentation
- Pro Form Financial Projection
- Legal Representations
- Corporate Governance documents
Once these are received and reviewed by a broker, the company can be listed on the site and proceed to raise funds with an accredited investor.
The SEC’s delay in creating the new regulations for crowdfunding is frustrating. However, the wheels are in motion and the future is bright. Once equity crowdfunding is permissible and in operation, not only will small businesses and entrepreneurs finally be able to substantially finance their projects but it will also lead to greater job creation and wealth.
Many believe too many regulations put in place by SEC may stop crowdfunding in its tracks. However, these regulations are designed to protect amateur entrepreneurs and others involved in crowdfunding from scams and other fraudulent activity. For this reason, it is important to allow the SEC to take the time to regulate crowdfunding properly to oversee its implementation and to avoid any unnecessary risks in order to protect the public. This will ensure that crowdfunding lives up to its ability for success and that entrepreneurs are protected from exploitation.