Crowdfunding has given small businesses greater access to cash, but even more than that—it’s leveled the playing field for many.
“Crowdfunding isn’t about collecting money,” Belgian online magazine editor and founder, Jozefien Daelemans, said in an interview in April 2015 for ThroughCracks.com. “It’s about making something happen with a crowd of people who believe in something. Normal people, not rich people with a lot of power, just people like you and me. And because there are so many of them, we can make change happen.”
Thanks to the Jumpstart Our Business Startups Act (JOBS Act), small businesses now have greater access to equity capital through crowdfunding. One of the most important sections of the JOBS Act for small businesses, pertaining to raising equity capital through crowdfunding, went into effect on May 16, 2016 (Title III – Crowdfunding). Here’s what the changes mean for small businesses in search of financing.
New Rules for Crowdfunding
Title III is the most effective portion of the JOBS Act, as this portion will allow small businesses to raise equity capital from individual investors through online funding portals (called intermediaries). This changes prior related securities laws, which only allowed companies to raise equity capital in this fashion through IPOs (for the most part) and the individual investors usually needed an over $1 million net worth (minus home equity) or $200,000 per year in annual income.
Title III of the JOBS Act allows businesses to raise as much as $1,000,000 within a 12-month period, from individual investors who can invest up to $2,000 or up to 5% of their net worth or annual income. For individual investors making over $100,000 a year or with a net worth over $100,000, then they can put up to 10% of their net worth or annual income in these investments.
Crowdfunding transactions will take place through established funding portal intermediaries that are registered with the SEC (Securities and Exchange Commission) and FINRA (Financial Industrial Regulatory Authority). Here are some funding portals you can take a look at:
The Good and the Bad
Small businesses still have a difficult time raising capital from traditional sources, no matter if it’s debt financing or equity financing, and especially startup businesses with fewer than three years of operational history, no established business credit, and no excellent financial or profitability history.
So the JOBS Act, and especially Title III of the legislation, offers another avenue for these businesses to raise equity capital even if it’s only up to $1 million within a 12-month period. Most small businesses can surely get off the ground with that $1 million capital ceiling.
However, while the higher access to equity capital is there, it also comes with high legal and accounting costs upfront and for ongoing reporting aspects with the SEC and others. Many small businesses that are strapped for cash might have a difficult time utilizing the platforms due to the high legal transaction costs.
Further developments in relation to the JOBS Act will be rolled out going forward, including proposed updates to the Title III section, such as proposals to reduce the high legal transaction and reporting costs, increasing the capital limit from $1 million to $3 million and higher, along with adding more funding portals to the mix.
FinTech disruption is here to stay. In combination with the disruption taking place on the debt financing side with major marketplace lenders like OnDeck, Funding Circle, and Lending Club, the disruption taking place on the equity financing side through JOBS Act intermediaries like SeedInvest and StartEngine are providing small businesses with many options to finance their innovations and continue being the number one creator of jobs in the United States.
All we can do at this point is wait anxiously to see how it all turns out, as technology continues to be the driving force of change in our financial services landscape.
More answers to pressing questions
This article was originally written on September 29, 2016 and updated on November 1, 2016.