Equity Crowdfunding – Just Around the Corner?

On Tuesday (March 27th), the U.S. House of Representatives approved the Senate’s version of the “Small Business Capitalization” amendment to the JOBS (Jumpstart Our Business Startups) Act.  This amendment allows small businesses to use equity-based crowd funding to generate investment into their businesses.

This doesn’t open the flood-gates and create some kind of fund-raising free-for-all that some opponents of the legislation might have you believe is the case.

The amendment, as added by the Senate, is basically similar to the language contained in HR 2930 – the Entrepreneur Access to Capital Act that had previously been passed by the House.  HR2930 was based upon the CrowdFund Investing (CFI) framework created by Sherwood Neiss, Jason Best and Zak Cassady-Dorion.  You can read more about CFI at Startup Exemption.

Once the President signs the JOBS Act this week, the SEC will begin 90 days of rulemaking, and then open their draft rules for 90 days of comments.  In addition, the folks at Startup Exemption and some others will be creating a “self-regulating” organization (SRO) to be the voice of the crowdfunding industry and work with the SEC to regulate funding platforms – much as FINRA does in the broader financial services industry.

Because of this, it is likely that the limits and regulations that we will see in the SEC and SRO rules will, in all likelihood, be very similar to those laid out in the CFI Framework.  The limits include provisions, such as:

  • an upper limit of $1 million in funds raised
  • only for USA “small businesses”, i.e., those with average annual gross revenue of less than $5 million for the last three years (or since incorporation if less than three years)
  • investments from unaccredited investors will be capped at $10,000 or 10% of their prior years Adjusted Gross Income (AGI)
  • all funding platforms will need to be “registered”
  • prior to using a crowdfunding platform, investors will have to agree that they understand:
    • there is no guarantee of return
    • they could lose their entire investment
    • their liquidity/return is limited to any dividends, sale, public offering or a merger of the company
  • the registration process for the business owner/entrepreneur will require significant personal information (to reduce the risk of fraudulent fund raisers)

With these kinds of limits and regulations (and others), it doesn’t look like the “wild west” that some opponents of the legislation have conjured up in their rhetoric.

On a different note, some of the legislation’s opponents also seem to think that “funding” is not really the issue that is holding back many small businesses, but I would beg to differ.  In a recent Wall Street Journal special section “Squaring Off on Small Business”, they had two people arguing the opposite sides of “Should Equity-Based Crowd Funding Be Legal?”.  “The Risks Are Too High” guy’s comments ran over onto the next page where, associated with another article, there was a survey that said entrepreneurs’ biggest challenge is “access to funding” – by 75% more than the next closest challenge.  Sort of blew his argument out of the water!!

In my experience, the large majority of angel and early stage funding today seems to be focused on technology opportunities – i.e., the next Facebook.  Meanwhile, I have seen good non-technology business ideas struggle to obtain the funding they need for the next step.

I’m pretty sure that the “crowds” will do just as good a job as “high-net worth individuals” of sniffing out good ideas – maybe they’ll even do a better job because every decision will not be controlled by the WIIFM (what’s in it for me!) that seems to underlie the decisions of the crowds chasing the next Facebook.

I, for one, am looking forward to equity-based crowd funding. What about you?

Excellent Execution

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