While the economy is still struggling, there has been a glimmer of hope recently with the increased awareness and embracing of small businesses. There seems to be a revival of the American entrepreneurial spirit going on. I believe that investing in small, community-based businesses will be the hallmark of economic recovery in the U.S. In April of this year, President Obama’s Jumpstart Our Business Start-ups Act (the “JOBS Act”) made those investments easier by enabling entrepreneurs to use crowdfunding to finance their businesses and secure investors.
I like to think of crowdfunding as a glorified form of passing the collection plate in church. You already have a good understanding of crowdfunding if you have been to a church service where congregants passed the collection plate for the building fund or the pastor’s love offering or T-shirts for the youth ministry. This concept was instilled in me as a preschooler in church when my mom would give me a quarter to place in the offering basket every Sunday. Crowdfunding is simply a vehicle for raising money from a large number of people, making small amount contributions. This has been done for generations but over the past decade, many charities, entrepreneurs, and micro-financing companies have formalized it over the internet. However, prior to the JOBS Act, crowdfunding was a model for donations, rather than investments.
UnSectored blogger Patrick Davis wrote about the potential of crowdfunding last December, and now the federal government has recognized crowdfunding as an essential capital-building tool for small businesses. The JOBS Act allows unaccredited investors to make equity investments in small or start-up businesses. The law makes it legal for these businesses to secure money from numerous investors without having to file extensive registration documentation with the Securities Exchange Commission. Specifically, the JOBS Act allows this SEC filing exemption for companies who raise up to $1 million a year from individual investors. As described in the recent white paper by Bloomberg, “The bill authorises companies to sell as much as $1m per year in securities to two classes of investor: (i) those with less than $100,000 in yearly income, who can invest up to either 5% of annual income or $2,000 (whichever is greater), or (ii) those with annual income above $100,000, who can invest up to 10% of income or up to $100,000.”
This substantially expands funding opportunities for small businesses without having to bear the burden of SEC filings — itself a cause for celebration because these requirements are tremendously costly and, therefore, prohibitive for small, community-based businesses. While there is a rulemaking process underway to establish standards for interpreting the details of the statute, the passage of the law is a tremendous milestone for small “Main Street” businesses and entrepreneurs that have struggled to raise money needed to get their projects off the ground.
Now, with all of its benefits, crowdfunding does not necessarily present a financial utopia for small businesses. To even begin the process of crowdfunding, a certain level of transparency and vulnerability is required. Companies must reveal their business plans and financial statements in the early stages of fundraising. Additionally, as the saying goes, “to whom much is given, much is required.” When using crowdfunding as a capital-building tool under the JOBS Act, businesses will need to be mindful that they must treat their numerous investors truly as investors and periodically supply updated information about the venture to each one and listen to investor input on the business. They will also need to file appropriate documentation and comply with their state securities laws. These are no small tasks.
However, overall, I am convinced that crowdfunding as an investment strategy will have a host of positive impacts on society in general. It will help small businesses get started. It will galvanize a greater sense of community and social responsibility for those investing in businesses they believe in. Also, it will enable creative thinkers who think outside of the standard corporate box to flourish and compete in the 21st century marketplace. It is time to pass the collection plate.
Photo credit: rubber bullets
I like to think of crowdfunding as a glorified form of passing the collection plate in church.
Crowdfunding will galvanize a greater sense of community and social responsibility for those investing in businesses they believe in.