Similar in concept to a public stock offering, crowdfunding enables entrepreneurs to solicit investment in their new or existing business through a broker-dealer or a “funding portal” website that advertises investment opportunities, and facilitates the transfer of funds.
Under the CROWDFUND Act, part of the 2012 Jumpstart Our Business Startups (JOBS) Act, a small business may raise up to $1 million in a 12-month period by selling its securities to investors without registering that offering with federal or state securities regulators. However, the Act places limitations on how and to whom a small business can sell its securities.
Though crowdfunding might seem to offer many advantages for expediting small business financing, entrepreneurs should move cautiously before utilizing this approach, particularly since the process is so new.
The North American Securities Administrators Association (NASAA) recommends carefully choosing a broker or funding portal, as unscrupulous operators may well attempt to take advantage of a small business owner’s unfamiliarity with crowdfunding rules and regulations.
NASAA also notes that while crowdfunding’s exemption federal and state securities registration is meant to lower capital-raising costs, a small business still needs legal guidance to ensure full compliance with the CROWDFUND Act’s requirements, as well as the general federal and state securities laws. Consulting with a licensed and experienced securities law attorney will help ensure your crowdfunding efforts are within the law.
Then there’s the cost of getting that financing. Though crowdfunding may be less expensive than a public offering of securities, it will likely prove more expensive than other, more conventional alternatives. What’s more, pursuing other sources of financing may also become more difficult, as venture capital companies or private equity funds may be less inclined to invest in a company that already has a crowd of small investors.
Federal and state laws provide other ways for a company to raise money from limited numbers of investors with little or no cost. The NASAA’s website, http://www.nasaa.org, provides links to all state securities regulators, which can provide more information on crowdfunding regulations and requirements, plus other options for raising capital.
To learn more about financing a small business, contact Raleigh SCORE. We provide free, confidential business mentoring and training workshops to small business owners. To schedule a free appointment with our experienced counselors, go to http://raleigh.score.org, or call us at 919-856-4739.