This article courtesy of Marsha Bailey
CEO & Founder, Women’s Economic Ventures
Chair, Association of Women’s Business Centers
In his book, Local Dollars, Local Sense, author Michael Shuman points out how nearly impossible it is for an individual to invest in a small, local business. For the vast majority of investors, Wall Street provides the only option for small investors to buy equity in a business.
That’s about to change.
In the past, only high net-worth individuals (accredited investors) could buy a share of a business that was not publicly owned – that is – traded on a stock exchange. The conventional wisdom was that wealthy investors were sophisticated enough to assess the risk they were taking and rich enough to sustain the loss should their assessment be wrong.
Now, with the SEC’s release of rules governing equity crowdfunding, those who are among the 99% can also invest in a new business down the street that we think has a lot of potential to grow.
What’s different? Most likely, you’ve heard of crowdfunding and perhaps even donated $25 or $100 to help get a business off the ground — the operative word being donated. In return for your donation, you may have received a product, a t-shirt, or a series of yoga lessons. What you didn’t receive was a share of the business.
Equity crowdfunding will enable you to actually own a share of the business you are investing in.
The Jumpstart Our Business Startups (JOBS) Act was passed in 2012. Why did it take so long for the SEC to release the rules governing equity crowdfunding? To put it bluntly, while the SEC considers wealthy people to be financially sophisticated, their assumption about the rest of us is, to put it nicely, paternalistic. I’m not saying they think we’re a bunch of rubes. Okay, I am saying that. Their concern is that people will make bad investment decisions and lose their money.
Following is a summary of Equity Crowdfunding and the SEC’s rules. (Thanks to Madison Services Group).
Crowdfunding Final Rule Report
Equity crowdfunding is an innovative and cost-effective, capital source for small firms. Crowdfunding allows a business to seek capital from a diverse group of investors through a website or “funding portal” and provides those investors with an equity stake or stock in the business. The Jumpstart Our Business Startups (JOBS) Act, enacted in 2012, created a structure to allow and expedite crowdfunding investments. The Act exempted crowdfunding transactions from the complex and expensive securities registration process and created a much simpler procedure. The Securities and Exchange Commission (SEC) is charged with carrying out the law governing crowdfunding.
On October 30, the SEC issued a final rule for crowdfunding that will be effective January 29, 2016. Highlights of the new requirement include:
- Small businesses can raise up to $1 million in a twelve-month period and must disclose:
- Financial statements
- How the proceeds from the offering will be used
- Corporate officers and directors
- Limits the amount an investor can spend to:
- $2,000 or 5% of their annual income or net worth (whichever is less) if both are below $100,000
- 10% of their annual income or net worth (whichever is less) if both are equal to or more than $100,000
- A total of $100,000 aggregate investments during a 12-month period
- Requires funding portals to register with the Financial Industry Regulatory authority (FINRA) and:
- Provide educational materials on how the funding portal operates
- Disclose how the portal is compensated
- Provide disclosures from the offering business
The SEC’s requirements will allow small businesses to raise capital through investment without triggering federal securities laws and registration requirements. Equity crowdfunding promotes capital formation for small firms while still providing protections and disclosures for investors. For more information, please see SEC Chair Mary Jo White’s statement on Regulation Crowdfunding.
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