Crowdfunding quickly became a popular means of funding for startups and small businesses, but did you know that there are different types? Rewards-based crowdfunding is the process most people are familiar with, having been popularized by sites like KickStarter and Indiegogo. In rewards-based crowdfunding, entrepreneurs raise funds from the public online, and in return, offer them products, services or other gifts. Because equity crowdfunding was limited only to accredited investors, it’s usefulness online was severely limited, and it didn’t become as popular as rewards-based crowdfunding. However, thanks to the 2012 Jobs Act and the new rules from the Securities and Exchange Commission (SEC), the equity crowdfunding landscape is changing.
What is Equity Crowdfunding?
Equity crowdfunding is a type of investing that lets the public invest money in a private company, in exchange for shares in that company. Until recently, the rules regarding equity crowdfunding were strict, and didn’t allow just anyone to invest. Previously, only people with more than $1 million in net worth, or with an income of at least $200,000 for the last two years, could invest in startups. These requirements were set up to protect the public and prevent people from being scammed, or from investing their entire life savings in a startup that fails. When President Obama signed the Jobs Act in 2012, it called for reforms to these regulations in order to allow businesses to raise money from their peers, friends, customers and more, instead of from just accredited investors. It took longer than expected, but those reforms have finally arrived.
How is Equity Crowdfunding Changing?
In an effort to increase access to capital for startups and small businesses, the new SEC reforms allow for any individual to invest in a company, as opposed to just accredited investors, and it can be done online. There are still some barriers to protect the public from scams, though – an individual can only invest 10 percent of their net worth, and startups can only raise $50 million per year. In addition, there are new complex disclosure requirements that must be reviewed by the SEC, and which cannot be done without a lawyer. For businesses, that could mean paying hefty costs, which some startups may not be able to afford. With more people able to invest in startups, small business funding could change for the better.
What Does This Mean for Small Businesses?
Funding is a high priority for startups and small businesses, because without the necessary funds, these companies can struggle to grow and prosper. According to the Q1 2015 Private Capital Access Index* from Pepperdine University and Dun & Bradstreet Credibility Corp., 36 percent of small businesses surveyed nationwide had to rely on their personal assets to fund their business needs. And, over half of these small businesses felt their growth opportunities were restricted. Crowdfunding became a creative way for small businesses to get access to working capital and fund their growth, and now with the changes to equity crowdfunding, there may be even more opportunities for these companies to succeed. While there are risks attached to the expansion of equity crowdfunding, it could be an overall positive change.
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