Need capital for a startup? Just about anybody can invest in startups now; after the Security and Exchange Commission (SEC) approved equity crowdfunding in 2016.
You might recall the SEC rules issued in March 2015, also known as affecting “Reg A+, put Title IV of the JOBS act into effect. Passage of the 2012 law was designed to make it easy for startups to easily raise funds.
Much like an initial public offering, an emerging business can raise from $5 million to $50 million in one of two tiers. In Tier I, an enterprise can raise $20 million in one year; and in Tier 2 it can raise as much as $50 million.
However, unlike an IPO, the regulatory burden of proof on the company is less stringent, which makes it riskier for investors.
There’s even an organization – the National Crowdfunding Association (NLCFA.com). The association partnered with the Film Finance Awards (FilmFinanceAwards.com) and Premier Media to produce the first annual “Film Crowdfunding Awards” in 2013.
How crowdfunding works
Many small businesses issue an online appeal for money – they fundraise via donations, pre-sales or licenses. One Web site, for example – indiegogo.com, accepts donations from people who contribute money.
Indiegogo’s commission can range from 4 to 9 percent.
Millions of entrepreneurs, investors and job seekers were waiting for the SEC to act — a decision was due in November 2012.
However, two issues delayed SEC action:
- Questions about investor education and fraud protection hadn’t been adequately vetted.
- SEC chairman Mary L. Schapiro had resigned. Her departure meant a further delay.
The law relaxed restrictions on venture capitalists, private equity firms and hedge funds so they can more easily market to investors.
When the JOBS Act was signed into law, the most talked about parts of the law were its crowdfunding provisions. They’re meant to ease restrictions on small businesses so that they can raise more money – from more investors – more easily.
SEC rules will still require such funds to sell only to accredited investors. Accredited investors have a net worth of $1 million or more, or who make in excess of $200,000 annually for two years. A couple must earn $300,000.
“In the last few years, the new sources of capital have included Super Angels (experienced successful entrepreneurs supporting new entrepreneurs), incubators and accelerators,” says Joey Tamer, the strategic consultant to entrepreneurs in technology and digital media, and to experienced consultants in all fields to maximize their practices.
Joey Tamer, www.joeytamer.com
“Now crowdfunding has joined in as one of the newer capital sources that is becoming popular among all sorts of start-up ventures, beyond music and the arts,” observes Ms. Tamer.
Welcome relief for capital
Inability to get a bank loan is a widespread headache for countless small businesses. Many banks aren’t loaning money, or most small business owners have an inadequate credit score to qualify for a loan or a line of credit.
Their bad credit scores are a result of slow sales and predatory lending practices of some big banks and credit card companies. If a businessperson was just one day late paying a bill, other big banks and credit card companies spotted it on the person’s credit report and then piled on. They were charging interest rates as high as 38 to 40 percent – usually for dubious excuses.
One such bank was Advanta. Ironically, it suffered huge losses because small businesspeople couldn’t afford the high interest rates and their principal amounts never decreased. Later, in bankruptcy court, Advanta’s CEO blamed his bank’s demise on the economy, but media reports indicated otherwise, such as Dennis Alter and the Tragedy of Advanta | Philadelphia Magazine.
So, small business is craving capital. However, fraud is a big concern.
Even though companies will be able to target investors via advertising, they won’t be able to guarantee returns.
“It remains to be seen if these protections will be useful in supporting crowdfunding (so it is not perceived as a scam) or a hindrance to its implementation in the startup world,” Ms. Tamer cautions.
Generally, investors like to jump on opportunities early. That’s when they have the best chance for bigger profits. However, their risks are highest in the early stages because that’s when small businesses usually fail.
From the Coach’s Corner, read these resources:
What Should You Divulge When Asking for Investment Capital? — If your startup is the next big thing, and you want venture capital, you can start smiling.
Why Startup Companies Fail – How to Win — It’s vital to conduct a thorough needs-assessment of strengths, weaknesses, opportunities and threats – followed by development and implementation of a strategic action plan.
You Have a Great Business Idea, but You’re Stuck in 1st Gear? — Budding entrepreneurs often have great ideas but many hit self-created stumbling blocks. The typical excuses and reasons are varied. They’re afraid of having their idea stolen. They’re indecisive about how to proceed. They’re not expert in management and operations. They’re unsure about the economy. Sound familiar?
8 Top Entrepreneurs Share How They Get Ideas — How can you get inspiration for outstanding business ideas? Not sure? Well, eight top innovators — alumni from the Stanford Graduate School of Business — have their favorite techniques.
“Investors have to ask themselves two questions. How much can we grow our investments? And, can we afford our mistakes?”