March 29, 2024

Crowdfunding

 

The Jobs Act became law in April and business owners and entrepreneurs throughout the country looked at the bill as an opportunity to access much needed capital.  The crowdfunding portion of the Jobs Act allows Non-Accredited Investors (regular people) to invest in businesses through online platforms.

Traditionally in order for a company to raise capital outside of the stock market they would work with a broker dealer to issue a Private Placement Memorandum (PPM) that Accredited Investors could see, and if interested invest.  This can be a costly endeavor for small businesses and precludes investors with lower net worth from participating in the round.  The new legislation changes the game for businesses and investors.  Now everyone has the opportunity to invest in the “next big thing” even if they make less than $250,000 per year.  Investors benefit from having access to opportunities that were typically unavailable to them, and businesses have access to an additional source of capital.

Crowdfunding has been extremely effective with sites like Kickstarter raising over $327 million for businesses.  Sites like CircleUp, offer crowdfunding through Accredited Investors, making it the best of both worlds.  More sites are coming online and geared up to start taking investment once the SEC has published their regulations.  Companies like RocketHub have been working with the SEC to provide them with white papers and information that could help them expedite the process.

The challenge is the SEC has been dragging its feet.  They were supposed to come out with guidelines and regulations for crowdfunding within 270 days.  They have failed to do so, in spite of a congressional mandate.  This should come as no surprise to citizens that have long since realized the wheels of the American Government move as efficiently as water going through a clogged drain.

The regulations surrounding broker dealers are significant and the SEC is looking for a way to decrease the requirements placed on the funding sites while simultaneously protecting investors.  Businesses looking for capital through crowdfunding sites will have to provide financial disclosures and other required documents to help investors make an informed decision.  Industry experts worry that these additional regulations and disclosures will make crowdfunding too expensive for business owners entrepreneurs to participate in.  This is a legitimate concern considering things like audited financial statements can cost over $10,000 per year.  For a small business looking to raise $500,000 the cost could be a significant chunk of their budget.  Those looking to raise smaller amounts may be able to get away with a standard Profit and Loss and Balance Sheet composed from accounting software.

Investors will also have a limit on how much they can invest through crowdfunding platforms in any given year.  This limit is supposed to help protect investors from their own lack of knowledge. The concern among regulators is that unsophisticated investors will connect with unsophisticated businesses and money will be lost.  While this is a definite possibility, any investment is a risk, and as recent history has proven “sophisticated” investors can still lose money.  The SEC needs to comply with the congressional mandate and complete the required regulations so that small businesses and investors can start benefiting from the legislation in the Jobs Act.

 

 

 

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