The Esquire’s Letter
Securing enough financing to start a business is often the main concern of many small business owners. Banks are often unwilling to take the risk and lend to a new or relatively new small business. For many small businesses and startups crowdfunding has filled the financing void. Crowdfunding involves the solicitation of funds from a large pool of potential investors or donors generally via the internet. In 2014 alone, U.S. crowdfunders raised $9.46 billion, (in equity and donation based crowdfunding) a 145% increase from the year before.
Enacted in April 2012, the Jumpstart Our Business Startups Act (The JOBS Act) was passed with bipartisan support and intended to make it easier for small businesses and startups to raise capital. The JOBS Act gives the ability for the general public to receive company equity in exchage for funding. Part of the JOBS Act, which permits accredited investors to invest via crowdfunding, was implemented immediately. An accredited investor is a term used by the SEC to refer to investors who are financially sophisticated, generally determined by his or her net worth.
As it relates to nonaccrediated investors, the Act instructed the Securities & Exchange Commission (the SEC) to propose rules for equity crowdfunding. To date those rules have not been adopted. Instead of waiting on the federal government, a growing number of states have passed legislation to permit crowdfunding inside a state’s borders – i.e. local businesses can raise money from residents of the state. Twenty-two states and the District of Columbia have enacted crowdfunding laws and regulations.
Is Crowdfunding Right For Your Small Business?
Should crowdfunding be part of the financing plan for your business? Here are a few issues to consider: 1) How much money will you need to raise? Many states limit the amount a company can raise to $1 million or $2 million. If you need more than the state’s limit you will have to devise other financing strategies in addition to crowdfunding. 2) How many investors do you want to answer to? Many investors, with the exception of accredited investors, are generally capped at investing $10,000.00 or less, therefore you may need a number of investors to reach your goal. You may be faced with a large number of investors who seek to provide a lot of input in the affairs of the business and who may not fully appreciate the inherent risk in investing in small businesses and startups.
Even if crowdfunding does not fit perfectly with your business, or if your crowdfunding campaign is ultimately unsuccessful, it may present a great (relatively inexpensive) way to create buzz for your small business.