In April of 2012, Congress passed the Jumpstart Our Business Startups (JOBS) Act, and President Obama signed it into law. While there were a number of provisions in the law, the item that generated some of the most interest was the introduction of rules governing investment crowdfunding.
What is Investment Crowdfunding?
Right now, crowdfunding as a business financing option is mostly related to gift giving. You provide funds for a specific business project, at a site like Kickstarter, and in return you receive a “thank you” gift. The gift is usually more extravagant as you give more money. However, this isn’t a true investment. You don’t have ownership in the company, and you won’t see a return — except for the “thank you” gift.
One of the reasons that crowdfunding has revolved around this method is due to the fact that SEC registration and other legal requirements related to disclosure are so burdensome — and can be costly to meet. So, to get around it, crowdfunding has largely focused on the gift model, as well as the P2P lending model, where “investors” actually lend money for businesses.
The JOBS Act changes that to some degree, easing some of the disclosure and other requirements related to what information you are required to provide investors in a business. As a result, investment crowdfunding is expected to be a way that small businesses can get funding from smaller investors. It provides businesses a way to raise funds, and issue stock to investors, without needing to woo big investors or venture capitalists.
Investment crowdfunding will be a way to use the Internet and social media to raise up to $1 million a year from smaller investors. It’s like the other crowd-related ways to raise money, from microlending to small entrepreneurs in third-world countries to other fundraising efforts through sites like Indiegogo. Only this time, it really will be an investment, and you have the potential to earn a return, since you will have ownership in the company.
What If You Want to Crowdfund Your Business?
Some of the guidelines are still being worked out, but sometime in early 2013, investment crowdfunding is supposed to be available. While some of the requirements for small businesses hoping to raise money through crowdfunding are less onerous, they are still there. Some of the items that a small business would need to provide to potential investors include:
- Your business plan.
- Basic business information, including a list of officers and major shareholders, and contact information for the business.
- Overview of how proceeds from the fundraising effort will be used.
- Disclosure of risk, explaining the possibility of loss, as well as other risks related to the business and its activities.
- Valuation approach, as well as the risk of dilution of the shares.
- Limited financial information, depending on how much money you are trying to raise. For offerings below $100,000, company-prepared statements and tax returns are acceptable. However, if you want to raise more, you will need to call in an outside professional for a review. Trying to raise more than $500,000 will require an actual audit of your company’s financials.
Overall, though, the JOBS Act streamlines the process, and should open up additional financing opportunities for small businesses, while giving smaller investors a chance to earn a decent return if the business in question does well.
(Editor Note: While I believe this part of the JOBS Act is a great idea, I’m concerned about the amount of fraud that will occur. Readers: What do you think of this new law?)