Is Your Small Business Eligible for Crowdfunding Under SEC Regulations?
July 18, 2016
Starting a new business is filled with challenges. Chief among these is raising capital. Entrepreneurs who are just getting a venture off of the ground frequently have difficulty obtaining a loan from traditional sources like banks. Unless they have significant personal assets or have already proven the success of their business idea, they may get turned down flat.
In recent years, this difficulty has led an increasing number of entrepreneurs to try crowdfunding via the Internet. Crowdfunding makes it possible to reach a large population of potential investors who may each make a small investment in return for shares in the company or other compensation.
The SEC quickly detected problems with this model. In fact, two entrepreneurs who attempted to use crowdfunding in 2011 to buy the Pabst Brewing Company found themselves in legal difficulties after they raised more than $200 million. In return for investments, people received a certificate of ownership and were entitled to however many beers their investment would purchase. The problem was that their offering was unregistered and made to people who were not accredited investors.
The SEC did not want to squash the entrepreneurial spirit of Americans like the men involved in the attempted purchase of Pabst. However, they did need to make certain that such transactions would be in compliance with regulations.
May 16, 2016 ushered in a new era as the SEC’s Crowdfunding Regulations became fully activated. Under the inducement of the JOBS Act, small business owners can now raise the capital they need via crowdfunding as long as they follow certain guidelines.
Crowdfunding Regulations are meant to help start-ups and small to mid-sized business that need to raise between $100,000 and $1,000,000 to start their operation. These are the new businesses that have the most difficulty securing traditional funding, and they are also the companies that are most likely to attract the interest of local people who want to support their economy.
Investors do have to meet certain financial requirements and can invest either 5% or 10% of their annual income or net worth depending on whether they have less than or more than $100,000 in annual income or net worth. In addition, all transactions under Regulation Crowdfunding must be exclusively conducted through one online platform that is registered with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Understanding Crowdfunding Regulations is the key to taking full advantage of the program. As long as a business is not an investment company and is organized in the United States, it is probably eligible. The company must be small and have a well-defined business plan. Its stock must not be listed on any exchange and its assets must not exceed $10 million. The company will also have to make certain filings with the SEC, but generally will not need audited financial statements.
Contact FitzGerald Yap Kreditor at (949) 788-8900 to find out if your new company qualifies for crowdfunding under SEC regulations.
