If you’re looking to raise money for your business or startup, you should start getting ready now to offer stock to the general public under the new law called Jumpstart our Business Startups, or JOBS Act.
Title III of the JOBS Act allows private businesses — even startups — to raise money from the general public for the first time since the great depression. Suddenly, internet crowdfunding is taking on a whole new complexion. (Read our prior post for a list of crowdfunding sites.)
In fact, you’ll soon be able to go online and offer investors three different ways to support your company financially: (1) equity or stock in your company; (2) company debt such as bonds; and (3) so-called revenue bonds that pay a set percentage of your future revenue.
Prior to the signing of the JOBS Act, a company could not ask Non-Accredited Investors* to buy stock, but only to make donations in exchange for small incentives or rewards. For example, a filmmaker trying to raise funds through crowdfunding could offer a copy of the finished film to all backers at a crowdfunding site like Kickstarter. ( * The Securities and Exchange Commission defines a non-accredited investor as anyone with a net worth under $1 million or earning less than $200,000 per year for the last 2 years.)
The Good News
Now, however, the JOBS Act creates crowdfunding exemptions from Rule 506 or 144A under the Securities Act of 1933, making it possible for small businesses to offer stock through advertisements and solicitations, including online portals.
This is great news for private companies including startups. You can raise up to $1 million through equity crowdfunding in one year.
It is also good news for crowdfunding portals themselves, many of which have been petitioning Congress to permit equity crowdfunding. Previously, using an equity crowdfunding portal like Crowdfunder was actually illegal. As of mid 2012, the “new and improved” Crowdfunder online equity crowdfunding portal was in beta-testing mode.
But Don’t Do It…Yet
Of course, there is concern that small-time investors might be scammed out of their money by unscrupulous startups or bogus middlemen. This is why the SEC has stated on its JOBS FAQs about Crowdfunding page that, until the SEC publishes specific rules and regulations governing these transactions, the practice will still be considered “unlawful under federal securities laws”.
The SEC has until January of 2013 to finalize the rules around crowdfunding transactions. Until then, companies eager to raise capital this way should heed the SEC’s “guidance” as provided in the May 2012 FAQ, as follows:
- Write a business plan
- Create an earnings statement
- Collect the biographies of all Board of Director members
- Write a description of the intended use of funds
- If you are targeting more than $100,000 in funds, have a public accountant review the offering
- If you are targeting more than $500,000 in funds, have an audited financial statement ready to provide for your investors
- And the perennial advice… use a licensed attorney and/or intermediary to complete the transaction
In addition to this advice for entrepreneurs, here are just some of the rules and regulations that the SEC is expected to release that will govern investors and intermediaries:
- No investor in a 12-month period will be allowed to purchase crowdfunded securities that, in total, exceed $1 million
- Crowdfunding intermediaries will need to register as brokers/dealers with the SEC and Financial Industry Regulatory Authority (FINRA)
- Intermediaries cannot provide investment advice or make recommendations to investors. They also cannot compensate their employees for promoting the sale of a company security that is listed on the intermediary’s website
- Intermediaries cannot hold, manage or possess investor funds/securities
So, what can equity crowdfunding do for your startup or small business? Investors who believe in your business can finally back you up with significant amounts of cash that will propel your business to the next level. Since you could raise up to $1 million per year this way, you could purchase much needed equipment, hire employees or expand your operations.
Dedicated to your (Crowdfunded) success… HalinaGuest Blogger Halina Zakowicz is a freelance writer who lives in Madison, Wisconsin. She writes for The Motley Fool Blog Network, Your Money and Debt and Yahoo! Finance. She is also a seasoned homebrewer and can instantly tell you the difference between a lager and ale or a steam beer and a Kolsch.