Crowdfunding has been around for a while. Artists, authors, celebrities and inventors have been able to raise thousands (sometimes hundreds of thousands) to help fund their projects online in return for free products, tickets, books and more.
In April 2012, President Obama signed the JOBS Act, which included a section that gave businesses the opportunity to leverage crowdfunding to raise money through equity offerings in their companies. Unfortunately, the initial rules issued by the SEC were pretty onerous at the time and few companies took advantage of the opportunity. However, earlier this year the SEC issued new rules about crowdfunding, and with these changes, you now have another source of capital available for your business. Here are six things you should know.
1. Both accredited and unaccredited investors can now invest in your company.
This means that you no longer have to solicit funds from institutions, such as investment banks or investors who do this for a living. There are now no shareholder limits. You can raise crowdfunded money from your friends, family or anyone else who wants a piece of the action.
2. If you want to raise more than $20 million over a twelve month period of time, the rules get more complicated.
“Tier 1” financings, or those under $20 million, have the least amount of regulations. Once you go above that level (and up to $50 million) you're going to be faced with stiffer initial and ongoing SEC reporting requirements, state reviews and limitations on how much a non-accredited individual can invest in your company. Even so, it's still easier to raise as much as $50 million from crowdfunded equity investors than ever before.
3. If you want to raise between $5 million to $20 million over a twelve month period of time, the rules have been relaxed.
You can advertise with few restrictions, your financial statements only need to be reviewed by an accountant (instead of an audit, which is much more costly and time consuming) and individual investors can “self-certify” their income and net worth, rather than subject themselves to more burdensome documentation. The big news is that your company will not be subject to “Blue Sky” laws, which means the SEC and the states will perform a “coordinated review” of your filing instead of you having to file separate paperwork in each state. Coordinated review is new and unproven so it will be interesting to see how well this works going forward.
4. Individual states have their own crowdfunding rules which may be more attractive for you.
The states’ rules allow for local companies to raise equity money from local, individual investors more easily than going the federal route. To see if your state allows equity crowdfunding, or is planning to allow it, check out the Intrastate Crowdfunding Directory.
5. Your financing possibilities have now been multiplied.
You no longer have to go to a bank for a loan or borrow money from your family and friends. If you want to purchase another business, start a real estate company to buy a building (or an equipment company to buy and then lease back machinery to your company) or just raise working capital for your business, and you’re willing to give up some equity, now you can. Up until 2015, the requirements needed made this too complex and costly for most of us.
6. You should still be wary.
There are still some potentially large roadblocks. One is that an Offering Circular is still required by the SEC no matter the size of your offering. This is a disclosure document and will receive the same level of scrutiny as an S-1 Initial Public Offering by the SEC. You will need accountants and lawyers and advisers, and they’re all going to have to figure out how these new requirements work. The second is state compliance. “Coordinated review” is new and attempts to solve a thorny issue of compliance and investor protection between the states and the SEC.
Going forward, there are still many questions when it comes to crowdfunding. What platforms will be best suited for business equity financing? What paperwork will be required? How well will the “coordinated review” between the states and the SEC work? What professionals (attorneys, accountants) will be needed to assist you and how well-versed are they in these new rules? When will individual investors become educated enough to understand this new way of investing? When will you? I believe crowdfunding will be a powerful and popular way for small companies to raise money over the years to come. But this may take some time. And smart business owners will keep an eye on these developments as they mature.