In recent years, crowdfunding has become a subject of great interest to entrepreneurs and small businesses. But what is crowdfunding and can it help your business?
What is crowdfunding?
Crowdfunding is the practice of raising relatively small amounts of money from numerous individuals. For some time now, websites like Kickstarter.com and RocketHub.com have offered entrepreneurs a way to raise money from “the crowd.” However, the Securities and Exchange Commission (SEC) rules state that crowdfunding investors are prohibited from receiving an ownership interest in the company in exchange for their investment. That is now about to change.
What is the JOBS Act?
In the spring of 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, which, among other things, authorized the SEC to adopt new rules allowing companies to offer investors an equity interest in the company via crowdfunding. Proponents of crowdfunding claim that the new SEC rules will allow startups to more easily raise money, particularly in a difficult economic environment. Critics claim that crowdfunding does not provide enough protection to investors from fraud and other risks associated with investing in small, private companies.
What are the advantages of crowdfunding?
Crowdfunding offers small companies the opportunity to quickly raise money when other forms of fundraising may be unavailable or out of reach. If your company only needs to raise a relatively small amount of money, and has limited resources to do so, crowdfunding may be a viable option.
What are the disadvantages of crowdfunding?
Companies who participate in this type of equity fundraising will likely be subject to mandatory federal reporting requirements and certain other standards. It could take a significant amount of time and money to comply with such reporting requirements.
Can I start equity crowdfunding right now?
The SEC has cautioned companies not to jump the gun. Until the SEC finalizes the rules, companies are not allowed to engage in equity crowdfunding.
Where can I find more information about crowdfunding and the JOBS Act?
First, consult your attorney. You can also check out these links and articles:
Joseph Hinckley is an associate in the Jones Waldo Business Department. CLICK HERE for his bio and contact information.