If you’re looking for ways to raise capital for your company, you may consider crowdfunding.
These ten facts will help you decide if crowdfunding is right for you.
1. Come Together
Republicans and Democrats in Congress came together to pass the Jumpstart Our Business Startups (JOBS) Act of 2012, and President Obama signed it into law on April 5, 2012.
The stated purpose of the JOBS Act is to ease the burden on smaller companies looking to obtain capital from public and private sources. The JOBS Act makes crowdfunding legal.
2. Who Needs a Mil?
The newly created crowdfunding exemption allows a small company to sell up to $1.07 million worth of the company’s stock or other ownership interests within a 12 month period.
3. It Takes a Crowd.
Crowdfunding investors are limited in how much they can invest in each company. For investors with annual income or net worth less than $107,000, the limit is $2,200, 5% of annual income, or 5% of net worth, whichever amount is greatest.
For investors with annual income or net worth of $107,000 or more, the limit is $107,000. The numbers are set to adjust for inflation every five years.
4. A Portal to Jump Through.
Companies can’t tap into the crowd on their own. Crowdfunding offerings must be conducted through a registered broker or a registered funding portal. FINRA approved funding portals include SeedInvest, NextSeed, MicroVentures, and Wefunder.
The broker of the funding portal is responsible for ensuring that crowdfunding investors are qualified and provided information about the company.
5. Keep it Quiet.
Companies cannot advertise their own crowdfunding offerings, except to direct potential investors to their designated broker or portal.
6. Hold On Tight.
Crowdfunding investors are required to hold onto their investment in the company for at least one year unless they sell to the company, an accredited investor, a family member, or as part of an IPO.
7. Let the Sunshine In.
Companies must file information with the SEC, including the names of directors, officers, and majority shareholders, a description of the company’s business, a description of the company’s financial condition (including other offerings), and financial information. The same information must be provided to each crowdfunding investor.
8. Rights for All.
Each crowdfunding investor will have rights in the company provided by state law and organizational documents. These rights might include the right to vote on the election of directors and certain actions, the right to review the company’s financials, and the right to demand a fair repurchase price. The SEC’s anti-fraud regulations also apply to crowdfunding offerings.
9. So Long “S”.
S corporation status generally requires that a company have no more than 100 shareholders and excludes most other companies as eligible investors. A company with these restrictions might have a hard time raising significant capital through crowdfunding.
10. What Else You Got?
Crowdfunding is not for every company. Fortunately, there are numerous ways for a growing company to raise need capital, including “friends and family” financing, commercial and private loans, intrastate offerings, and federally exempt private offerings. A company should review all of the alternatives before deciding on crowdfunding.