Crowdfunding for Small Businesses and Startups

Posted by Edward Sharkey on Fri, 07/13/2012 - 21:38

Small businesses and startups are excited about a key provision of the new JOBS bill. For the first time, businesses can raise up to $1 million (each year) through public "crowdfunding", without having to register a public offering.

This is a tremendous simplification of the process.

Previously, to sell stock of any kind, a business had to register the offer with the SEC, or get an exemption under fairly strict limitations on who could invest and how the issue could be promoted. Both paths were costly and cumbersome. Now, businesses will be able to raise up to $1 million through public offerings to non-accredited investors. The expectation is that this will be accomplished through existing broker-dealers or approved “funding portals” that will register with the SEC. Already, crowdfunding sites are positioning themselves online.

Disclosures will still be needed. A company that wants to raise less than $100,000 will need to provide tax returns and financial statements certified by the CEO. For $100,000 to $499,000, the company’s financial statements will need to be reviewed by a public accountant. For $500,000 to $1 million, a company will need to provide audited financials.

Investors with incomes of less than $100,000 will be limited to investing 5% of income or a $2,000. Those who make more than $100,000 will be limited to 10% of income or $10,000. The bill also raises the cap on the number of shareholders a business may have before being required to register with the SEC from 500 to 1,000. Businesses also are allowed to raise up to $50 million before starting the process of going public.

The SEC is working on regulations to implement the law, which should be ready in early 2013. All of this is going to help reduce the cost and friction of bringing capital to small businesses and startups. It will not eliminate all of the costs. Issuers will still need to prepare and file disclosure statements, including a description of the business and a business plan. In addition, issuers raising $100,000 or more will need a public accountant. But it is a giant step toward liberalizing the capital markets at a time when it is tough for small businesses to find funding.

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