First, what it is.
Crowdfunding takes advantage of the populist nature of the Internet. You make your pitch, people decide if your idea is worthy, and invest whatever they feel they can. Sort of like angel investors who take a large stake in your business. But with crowdfunding, you get a lot of people (hence, the crowd) taking a smaller stake in your business by contributing toward your funding target. This spreads the risk and creates a strong network of support. You may have heard of some of the popular crowdfunding sites such as Kickstarter and Wefunder.
Crowdfunding has been successful for real estate investments, business startups, new ventures, projects and ideas. Thanks to the JOBS Act of 2012 – which established the foundation for start-ups and small businesses to raise capital through crowdfunding – businesses seeking crowdfunding will be able to raise as much as $1 million a year without having to do a public offering, a costly step that requires state-by-state regulations. Sounds like easy money, right? Not so fast.
New Securities and Exchange Commission (SEC) Rules
The JOBS Act also required the SEC to come up with some guidelines, and they’re fairly extensive. Though the SEC said their goal was to “strike a balance between maintaining flexibility and cost savings for companies raising capital with the need to protect individual investors,” the end result of the rules just announced will make crowdfunding harder.
For example, the proposed rules:
- Put limitations on the amount of funds an issuer can raise, and the amount an individual investor may invest, in crowdfunding transactions.
- Impose disclosure obligations, including an offering statement that must be filed with the SEC, provided to its intermediary, and made available to investors. Businesses will have to disclose, among other things, information about officers, directors, and 20 percent owners; your business plans, number of employees, and the use of proceeds from the offering; as well as information about the risks of the offering. You will also need to disclose the price to the public of the securities being offered, how the valuation of the securities was determined, the target offering amount, the deadline to reach the target amount, and whether you will accept capital in excess of the target amount.
- Place prohibitions on advertising crowdfunding offerings, other than very limited notices and communications.
- Require that crowdfunding transactions take place exclusively online through platforms operated by an SEC-registered intermediary, either a broker-dealer or a new type of SEC registrant called a “funding portal.”
And those are just the beginning! Sounds like a lot of hoops to jump through, right? Small businesses want a faster, easier solution. Even the SEC said that the proposed rules “could significantly affect the viability of crowdfunding as a capital-raising method for startups and small businesses.” We agree. And that’s why we feel crowdfunding will remain on the fringes of the lending landscape, at least in the near future.
Author: Ben Van Zee founded Commonwealth Capital in 2011 with the goal of bringing accounts receivable factoring solutions to small, underserved business in the Upper Midwest United States.
Prior to starting Commonwealth Capital, he oversaw the acquisition, repositioning, and marketing of distressed properties for his family’s real estate business as well the origination and administration of its construction lending portfolio. It was through his experiences working with banks and small businesses that his passion to help small, growing companies started.
At Commonwealth Capital he leads the company across its sales and marketing efforts, along with overseeing credit and underwriting. His continued study in various areas of business and finance helps him develop innovative ways to help businesses meet their working capital needs.
He is a member of the Commercial Finance Association, the Risk Management Association, and the International Factoring Association. He has completed professional development classes at the University of St. Thomas and is a graduate of Hennepin Technical College.