5 Key Points To Know About Equity Crowdfunding
In April 2012, President Obama signed the JOBS (Jumpstart Our Business Startups) Act, aiming to revitalize opportunities for entrepreneurs, startups, and small businesses; e.g. America’s main job creators. Briefly, main benefits of the JOBS Act as it is now are as follows.
The JOBS Act will enable entrepreneurs, start-ups, and small businesses to raise funds and gather investors through equity crowdfunding. It will reopen American Capital Markets to Emerging Growth Companies (Companies with total annual gross revenues of less than $1 billion). It also lifts the ban on general solicitation/advertising; allowing entrepreneurs, start-ups, and small businesses to advertise for new investors, and assures that these businesses will have the necessary time and flexibility needed to grow.
As an entrepreneur, you are probably as anxious as anybody to start taking advantage of these benefits. However, as with any large-scale implementation, there are many challenges before the full implementation of the JOBS Act is finalized, which is now expected to be at the end of 2013. Given the current state of the legislation, especially in regards to equity crowdfunding, here are 5 key things to consider in the meantime.
1: Key Events and Timeline of the JOBS Act
Though the Act was signed back in April 2012, not all of the benefits can currently be realized. The most notably absent enactment is that of equity crowdfunding, which the Securities and Exchange Commission was given 270 days to develop regulations for. This would’ve originally put the deadline at December 31st, 2012.
However, with recent events such as Former Chairman of the SEC Mary Schapiro stepping down, optimists have pushed back this deadline to Q4 of 2013. In light of Schapiro’s resignation, President Obama has appointed SEC Commissioner Elisse Walter to take her place until further notice. Walter will be working on the final regulations to Title III of the JOBS Act pertaining to equity crowdfunding, and could hold this position until the end of 2013.
2: What you can do now to get funding
Equity crowdfunding may not be ready for action yet, but that doesn’t mean you’re out of luck if you’re planning on tapping into crowdfunding to raise funds for your venture. There is always the landscape of rewards-based crowdfunding, in which ventures offer gifts to pledgers in exchange for funding. However, rewards-based crowdfunding may lack the ability to raise large volume of funds comparable to an institutional seed or series round.
Certain platforms such as the company I co-founded, RockThePost have found ways to realize the benefits of equity crowdfunding without waiting until the end of 2013 to operate.
By offering securities only to accredited investors and establishing partnerships with registered broker dealers, these platforms are able to abide by current guidelines and raise large amounts of money for aspiring entrepreneurs.
This method of operation has already seen success stories of ventures raising amounts in the millions. If you are an accredited investor looking for opportunities to gain a share in upcoming innovation, or an entrepreneur with a company looking to break through into the next stage, it is definitely worth exploring the current platforms out there allowing this ability.
3: How it works for Investors
If considering this route, it is important to know how everything works. Securities are offered through registered broker dealers with the crowdfunding platforms acting solely as intermediaries. Equity crowdfunding calls for the general public to be able to invest in the securities of small businesses and startups listed on the crowdfunding platforms (provided they meet certain financial requirements), but for now these securities are only available to accredited investors.
Currently, even the details of the deals and companies are only available to accredited investors. To be considered an accredited investor, one must either:
-Earn an individual income of more than $200,000 per year or a joint income of $300,000.
-Have a net worth exceeding $1 million either individually or jointly with his/her spouse.
-Be a general partner, executive officer, director or related combination for the issuer of a security being offered.
Though the guidelines are strict, they make for professional, gated communities on certain crowdfunding platforms that are vetted of established figures and verified companies.
4: How it works for Companies
If the raises are only open to accredited investors and are conducted on a platform who is currently in partnership with a registered broker dealer, the size of the raise actually can be anywhere from $100,000 to $5,000,000.
This all means that the average raise will be significantly higher than is typically seen in the reward-based landscape. There will also be a corresponding increase in guidelines and standards that companies have to meet in order to be listed on a platform.
Of course, a company doesn’t have to wait until the end of 2013 to raise funds this way. By applying to one of the crowdfunding platforms that are operating with registered broker dealers; entrepreneurs, start-ups and small businesses can gain access to the gated communities of professional accredited investors who are constantly evaluating new deals.
To make ends meet and have these communities be of high quality and trust for both the ventures raising funds and the accredited investors taking a stake in them, there are a series of documents that are required to be collected for the initial application process. On RockThePost, these include, at a minimum:
-Pro Forma Financial Projections
-Corporate Governance Documents
Once these are received and reviewed by the broker dealer, the companies can be listed on the site and proceed to raise funds with accredited investors.
5: Regulations are Important
The prospect of equity crowdfunding finally being in operation is exciting and frustrating at the same time. The ability for the general public to become investors in start-ups and small businesses would no doubt increase job creation and lower the unemployment rate, but the implementation has been pushed back almost a year.
However, think about it. This is all for good reason! The JOBS Act is pioneering legislation that will give rise to a young, disruptive private securities market. And not only that, but this new industry will do good for the nation. If sufficient regulations aren’t established, this potential game changer could end up being a disaster, with possible scams and exploitation of amateur investors, increased risk of fraud, and negative impact on other established industries such as social media.
In essence, it may be for the best that the SEC is taking its time in making sure Title III is necessarily regulated. And in the meantime, there is already an established, trustworthy system that platforms such as RockThePost have put in operation, which allows verified start-ups and small businesses to raise large volumes of funding from accredited investors. If you fall into either category, it’s definitely worth exploring!