By Alex Gladu, Independent We Stand
To say that crowdfunding options for small businesses and entrepreneurs have been a long time coming is a clear understatement. In 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law, promising valuable support to small businesses and startups across the country. Four years later, an integral piece of the JOBS Act will finally come to life, as new crowdfunding rules take action on May 16.
Title III of the JOBS Act, also known as Regulation Crowdfunding, opens up the popular online, grassroots fundraising method to entrepreneurs and business owners looking to raise capital. The Securities and Exchange Commission finalized its rules for business crowdfunding at the end of last year, but the rules had to sit on the books of the Federal Register for 180 days before they could go into effect. Beginning May 16, entrepreneurs won’t have to turn to the Shark Tank for all of their financial needs. Rather, they can make use of sites like Kickstarter and supporters like their next-door neighbor.
According to the new rules, businesses can raise up to $1 million on crowdfunding websites. Essentially, the SEC has recognized such sites as a new intermediary for investments. However, as Sherwood Neiss, principal at Crowdfund Capital Advisors, wrote for Locavesting, crowdfunding for businesses isn’t as simple as signing up for a Kickstarter profile. Businesses will need to comply with SEC disclosure requirements and, in some cases, hire an independent public accountant.
Thanks to these stipulations and others, Regulation Crowdfunding may not be a perfect solution for small businesses. According to Locavesting, the SEC’s regulations effectively put up a barrier between businesses and grassroots investors, as crowdfunding sites can limit what businesses can say to potential investors. Additionally, the $1 million cap on crowdfunding investments means that complying with the SEC’s regulations and paying for access to the site itself may discourage some entrepreneurs, particularly when the median seed deal size in recent years has topped $1.7 million, according to Forbes.
That said, businesses in many states have already had the opportunity to venture with crowdfunding. During the four-year gap between President Obama’s signing of the JOBS Act and the SEC’s finalization of the rules, at least 22 states and the District of Columbia enacted crowdfunding laws of their own, according to The New York Times. State laws have often looked similar to the new federal regulations, including fundraising limits for businesses and individual investors. Still, the laws have allowed small businesses to reach new supporters and they’ve encouraged more citizens to invest in their state’s businesses. As Street Shares CEO Mark Rockefeller advises, crowdfunding has allowed startups that don’t necessarily have revenue – or even a product – yet to spread the word about their business to a wider audience.
Despite the potential drawbacks, Regulation Crowdfunding presents a new opportunity for small businesses and entrepreneurs to get the funding they need. In turn, these businesses make communities and local economies stronger, reinvesting what money they earn into their locality. To keep up with crowdfunding rules and other local investing trends, visit www.locavesting.com or www.streetshares.com.
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