By Bert Seither
Bert Seither is the Vice President at 1800Accountant, the nation’s leading accounting and consulting firm for small businesses and entrepreneurs. For over a decade, Seither has assisted thousands of small business owners by helping them achieve financial freedom.
Small business owners in all industries out there look wide and far for any opportunities to raise funding for their startup ventures. One of the most popular 21st-century funding options lies with crowdfunding.
A Lowdown on the Crowdfunding Process
Crowdfunding involves the collective effort of multiple people who provide capital to an actual business plan, a product idea, or a certain cause. In many cases, entrepreneurs offer various amounts of equity to investors who then get a cut of the money a business generates. The crowdfunding process normally takes place online. It’s so much easier to connect with a large pool of possible investors on the Internet than all other methods because of the worldwide reach of the web’s tentacles.
Kickstarter, Indiegogo, and WeFunder are just a few of the many crowdfunding sites out there. Users can define what type of effort for which they want to raise capital. Investors can then browse these listings and decide which ones they want to contribute to financially. These sites often allow investors to spend as little as $100 to as much as $250,000 to fund startup ideas. However, there are restrictions on who can provide funding, how much they can provide, and the various forms of payment allowed.
The JOBS Act of 2012
In April 2012, President Obama and Congress passed the Jumpstart Our Business Startups (JOBS) Act. This legislation lifted some of the restrictions that had prevented public solicitation of funding for private enterprises. The passage of this act demonstrated the growing use and need for crowdfunding platforms to help spur growth among startups and small businesses, which drive the nation’s economy.
While the JOBS Act was a major step in the right direction for crowdfunding, lawmakers on both sides of the aisle have noted that it has not opened certain doors quite as wide as its original intentions were. Specifically, Title III of this law – the main cornerstone of it – has not been expanded upon much since its original enactment.
SEC’s Proposal on Allowing Startups to Offer Stock Options Through Crowdfunding
In October 2013, the Securities and Exchange Commission (SEC) voted unanimously to develop rules and regulations to allow investors to buy stock in startups and established companies via crowdfunding platforms. These rules could transform how companies raise capital as this would allow them to get around the traditional costs of taking a company public through an IPO.
These proposed rules would essentially create a brand new financial entity called a funding portal. It would function as a website designed to electronically connect investors with startup companies and entrepreneurs looking to raise capital.
These new guidelines would cap a company’s ability to bring in funds via crowdfunding at $1 million per 12-month period. For investors who have an annual net income or worth of under $100,000, they can invest a maximum of 5% of this amount – or up to $2,000 – whichever is greater – per each 12-month period. Investors who have an annual income or net worth of more than $100,000 are able to invest a maximum of 10% of this amount every 12 months. Any securities purchased through these funding portals would have to be held for one year before being sold.
How States are Getting Involved
Eight states have already passed intrastate crowdfunding laws in an attempt to reduce the restrictions on federal laws that limit online solicitation of funding for businesses. However, any federal laws typically override those implemented at the state level. This is why until any rules are voted on and clarified at the federal level, there will remain some uncertainty about which types of startups can solicit for capital online, which platforms they can use, and which types of investors are allowed to open their wallets for these entrepreneurs.