With passage of the Jumpstart Our Small Businesses (JOBS) Act on April 5, small businesses will now have the opportunity to raise equity through crowdfunding. Crowdfunder.com shares these factoids:
- Small businesses currently receive only 17% of business financing (bank loans, venture capital, angel investors).
- If 1% of the $30 trillion held by Americans in long-term investments were to be shifted to small businesses, it would amount to more than 10 times the venture capital invested in 2011.
- Access to equity crowdfunding won’t begin until the SEC issues rules, which are required within 270 days of enactment (i.e., by early January 2013).
How much can you raise?
You will be able to use crowdfunding to raise up to $1 million. Businesses that need more funding will have to comply with the general SEC public offering requirements. Once you raise money totaling $1 million, you’ll have to wait at least 12 months before another crowdfunding offering. Also, once the number of investors exceeds 2,000, you’ll have to register with the SEC.
Until now, raising equity was limited to approaching “accredited investors,” which means individuals with a net worth exceeding $1 million (exclusive of their primary residence) or $200,000 in annual income. Crowdfunding has been extended to nonaccredited investors. Investments by these nonaccredited investors are restricted to:
- $2,000 or 5% of income if annual income is less than $100,000.
- 10% of income (up to $100,000 investment) if income is more than $100,000.
Sharing financial information
To participate in crowdfunding, your company must provide certain financial information. If you want to raise:
- $100,000 or less: Tax returns and a financial statement certified by a company principal.
- $100,000 to $500,000: Tax return and a financial statement must be reviewed by independent accountants.
- More than $500,000: Audited financial statements
Once you have investors, be prepared to communicate regularly with them. Rules on frequency and disclosure that have yet to be issued by the SEC likely will address this concern.