With the so-called “sharing economy” delivering untold wealth to savvy twenty-somethings, entrepreneurs are correctly wondering how this economic phenomenon translates to capital-raising for start-ups. Enter: crowdfunding. Crowdfunding aims to connect start-up companies with capital in the form of small investments from individual investors usually through a web portal. Not exactly a new revelation, since 2009 capital raises completed using crowdfunding as the primary source have more than quadrupled!
Websites and other portals like Crowdfunder, GoFundMe, and AngelList have become a source of start-up capital for entrepreneurs. They can provide quick access to capital for early stage companies to engage in market research or proof-of-concept trials. These websites do, however, present some complex legal considerations and risks inherent in raising capital.
As required under the JOBS Act from April 2012, the U.S. Securities and Exchange Commission recently issued its final rules — Regulation Crowdfunding — governing crowdfunding offerings. With Regulation Crowdfunding, the SEC has finally delivered in the JOBS Act promise of delivering a crowdfunding option for small businesses and entrepreneurs. In the final rules, the SEC responded to the public commenters that the proposed rules were too restrictive and expensive for start-ups. With the new rules, effective in 2016, issuers have an exemption to raise up to $1 million in any 12-month period to investors. Individual investors are limited in the amount they can invest. Also depending on the size of the offering, issuers must make the required disclosures regarding use of proceeds, offering price, capital structure, debt, transfer restrictions, and business risk factors. Issuers must also provide the required financial statements, with the required oversight of the financial statements (i.e. reviewed or audited) increasing depending on the size of the offering. Individual investors have an unconditional right to cancel an investment until 48 hours prior to the offering’s closing. If an offering does not meet the targeted capital raise set by the issuers, all investment commitments will be returned to individual investors.
Either through the cloud or more traditional sources, if your company is seeking capital from outside investors you should been keenly aware of the securities regulations governing the offering. Crowdfunding could be answer for your company, but Regulation Crowdfunding may complicate matters before simplifying them.
