Will SEC’s Crowdfunding Rules Help Propel Economy?

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.

From independent filmmaking to Web sites for kids, businesspeople have increasingly depended on crowdfunding for raising cash. Crowdfunding is a way to raise small amounts of money from a lot of people and investment groups online.

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:

  1. Questions about investor education and fraud protection hadn’t been adequately vetted.
  2. 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 involvement

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 TamerJoey 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?”

-Mohamed El-Erian


Author Terry Corbell has written innumerable online business-enhancement articles, and is also a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry. 

Funding Options to Navigate This Marketplace Bedlam

Part one of two-part series: “Solutions for a Roller Coaster Marketplace”

Aug. 13, 2011 – 

OK, it’s been a wild ride, right? Uncertainties regarding Wall Street, actions by the Federal Reserve, and funding often set off alarm bells. But if you’re looking for capital, there are reasons to hope, according to leading consultant Joey Tamer.

Ms. Tamer acknowledges that the wildly gyrating stock market and withdrawals of initial public offerings are top-of-mind concerns. “…the change in IPO activity may be the most significant,” she writes in a blog post, “Will stock market chaos create venture capital downturn?

“Venture capitalists are excited by a predictable exit market, either strong M&A (mergers and acquisition) activity or several powerful IPOs coming in the near future,” she writes. “If they believe they must wait for these liquidity events, or cannot predict when these will be active, the VCs will become more conservative in their choices, and protect their portfolios.”

Ms. Tamer is imminently qualified to comment. As a trusted source on this business portal, she’s a strategic consultant to entrepreneurs in technology and digital media, and to experienced consultants in all fields to maximize their practices.

Joey TamerJoey Tamer, www.joeytamer.com

Having experienced five downturns, she recalls the trends from the last two recessions – patterns, which could repeat now.

She says the patterns include:

  • Deals that were not completed at that time rarely were completed.
  • VCs took, justifiably, defensive measures to ensure that their existing portfolio companies had enough capital to move forward on their growth cycle.  The VCs allocated much of their existing Funds to those investments already secured.  This left much less for “venturing” into new risks. And the VC’s return on investment (ROI) on their portfolios was threatened, and that ROI is the basis of the VCs being able to raise their next Fund and so to survive.
  • VCs became more conservative in the risks they would take.  On my various VC panels in the tech industry (Digital Hollywood, CES, and others), they admitted (this was 2008 and early 2009) they were “broadening their early stage searches” to include those startups that had revenue and market traction.  This criteria became a standard, leaving seed and Series A capital more and more to angel investors and angel groups.
  • Deal terms became more aggressive against the entrepreneur, to protect the VCs from potential downside.
  • Years of limited capital drove entrepreneurs to bootstrap their companies (since there weren’t jobs for them anyway) and get their companies into a much safer stage once the capital began to flow again.

Ms. Tamer cautions “the cycles of boom and bust are coming too close together.”

Specifically, she warns:

  • After the downturn of 2000/2001, the VCs didn’t get truly active again until 2004.
  • The next bust was 2008, with investment beginning again in 2010, and more actively in 2011.
  • Three to four years of an active investing cycle is not enough time for entrepreneurs to recover from these downturns, especially if the uptick in investing lasts only 3 years going further.  This cycle stresses the VCs and their new Funds as well.
  • VCs are handling portfolios with an exit cycle of 6-8 years from funding.  Entrepreneurs may launch and get traction in 3 years after funding (which means 4-5 years after they begin the company), but they are rarely scaling until year 4 post-funding.
  • Notice the age of the potential IPOs — up to 8-10 years to build value and find a good IPO window (perhaps now closed again).

But as a knowledgeable veteran strategist, she knows fear leading to procrastination is unproductive for entrepreneurs.

I agree and often use two acronyms in illustrating the dangers of yielding to FEAR:

  • “Frantic effort to avoid responsibility”
  • “False evidence appearing real”

So, Ms. Tamer offers these strategies:

  • Keep building your companies, your technologies, your breakthroughs.  Who knows what will happen next week or next month?
  • Consider alternative forms of funding — private funding for an idea re-conceived for this new economic reality; strategic funding from a win/win bigger company that needs what you have; licensing and strategic revenue and no equity or debt funding at all;
  • Consider a different take on your product or service idea, or your target market sector, or your market timing, and create a company that builds wealth for you independent of the vagaries of the stock market and other people’s ideas about capital, risk and what is real. This is my favorite kind of company to build.

See 6 Values for Financial Protection for part 2 of this two-part series: “Solutions for a Roller Coaster Marketplace.”

From the Coach’s Corner, be sure to read Ms. Tamer’s opinions on other topics:

10 Characteristics of a Successful CEO — This is a 10-part series on CEO leadership by Joey Tamer, www.JoeyTamer.com. She is a consultant to experienced consultants in all fields to maximize their practices. She has also been a strategic consultant to entrepreneurs in technology and digital media.

What No One Tells You about Raising Investment Capital — Tepid economy or not, investment capital is indeed available. That’s true during all economic cycles, according to leading consultant Joey Tamer.

What Should You Divulge When Asking for Investment Capital? — For many startups, it makes sense to grow organically. But for others, the answer is to seek capital by making the right presentation to investors. Here’s how.

The 6 Values for Your Financial Protection — Debt is the catalyst of all financial woes, says esteemed associate Joey Tamer. Here are her six values to avoid financial traps.

8 Strategies to Consider Before Starting A Tech Business — Before you launch a tech business, here are eight salient strategies to remember.

“Do the thing we fear, and death of fear is certain.”
-Ralph Waldo Emerson­


Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Seattle business consultant Terry Corbell provides high-performance management services and strategies.