Small business owners often struggle with funding their business, choosing to bootstrap or use credit cards and loans because it’s hard to get in front of wealthy venture capitalists (and even harder to win these investors over.) On Monday, May 16, all of this changed with new Regulated Crowdfunding rules that will make it easier to get small business investments from multiple lower-level investors. The bill eliminates financial requirements of investors, so now everyone can become a venture capitalist with investments that give them a share of the company.
The JOBS Act
The new investment rules initially come from the JOBS Act, which stands for Jump-Start Our Business Start-Ups. Although it was signed into law in 2012, it took the Securities and Exchange Commission four years to iron out all of the details that would allow ordinary people to invest in businesses. The SEC was concerned that by allowing ‘regular’ people to invest, they may become vulnerable to fraud or make naïve decisions that cost them their life savings. The SEC has now sorted out all the fine details of the rule, which went into effect on Monday, and is known as Regulation Crowdfunding.
Regulation Crowdfunding & the Difference between Rewards and Equity Crowdfunding
Many business owners are already familiar with the term crowdfunding, which is an old system that took a modern form nearly a decade ago. So, if crowdfunding for businesses is already allowed, what is new about the Regulation Crowdfunding rules? The distinction lies in the difference between rewards crowdfunding and equity crowdfunding.
Prior to the JOBS Act, crowdfunding referred to rewards crowdfunding. Using sites like GoFundMe, KickStarter, and IndieGoGo, businesses can raise money to get their ideas off the ground. The fundraising involves getting contributions from regular people. In exchange, they get some form of reward – a t-shirt, a certificate, a free product, etc. This transaction is a form of fundraising, not investing.
The Regulation Crowdfunding rules pave the way for a different form of crowdfunding. In equity crowdfunding, people are not simply donating money or contributing to a campaign – they are investing in the business and by doing so will get equity in the company.
Anyone Can Be a Shark
By being able to make real investments that give you a legal stake in the company, small business investments are expanding past wealthy venture capitalists and Shark Tank investors so that ANYONE can be a Shark.
The old rules said that accredited investors must make at least $200,000 per year and have a net worth of at least $1 million. The Regulation Crowdfunding rules have removed these financial requirements so that anyone can invest; however, there are some restrictions:
- The amount individuals can invest will depend on their earnings and net worth.
- Based on your numbers, you can invest anywhere between $2,000 and $100,000 per year.
- In general, people who make crowdfunded small business investments must hold their shares for at least a year.
- Regulated Crowdfunding is not like investing in the stock market. To find another buyer for your share, you must use special marketplaces that offer this form of crowdfunding.
Wefunder is one such online marketplace has gotten a green light from regulators. Dozens of others are planning to enter the crowdfunded small business investments market too, such as CrowdBoarders, NextSeed, SeedInvest, and FlashFunders.
Is Regulated Crowdfunding Right for You?
From the business end, advocates say that regulated crowdfunding can help a business create a following of true brand advocates that will help the business grow. However, small business owners should understand that by taking investments they are giving away equity in their company.
From the investment end, people should understand that there are risks that come with investments, and it will be hard to find “blockbusters” because the best companies will still get funded by prestigious venture capitalists. However, Regulated Crowdfunding offers a way to support your favorite small business ventures and potentially make money.
For everyone involved, it’s wise to proceed cautiously by doing careful research before making any big moves. However, the new Regulated Crowdfunding rules should be beneficial because they expand the options for small business investments and give small business owners one more way to get the funding they need.