Attaching enough financing to start a business is more often than not the primary concern of many green entrepreneurs and business owners alike. One major business that is unwilling to take risks and lend relatively new “business owners” money is banks. Crowdfunding is the epicenter for many small business owners and startups looking to take that dream and turn it into a reality. Crowdfunding entails the solicitation of funds from a pool of potential investors or donors to use towards the overall starting of a business.
Enacted in April 2012, the Jumpstart Our Business Startups Act (The JOBS Act) was passed with bipartisan support making the bill pass through Congress with ease. It mainly intended to make it easier for small businesses and startups to raise capital to operate and support businesses. In addition, the JOBS Act gives the ability for the general public to receive company equity in exchange for funding. The JOBS Act, which permits accredited investors to invest via crowdfunding, was implemented immediately. An accredited investor is a term used by the SEC to refer to financially sophisticated investors, generally determined by their net worth. This makes it more accessible from the investor’s point of view to see all the risks involved when dispersing money to the business of their choice. As it relates to nonaccredited investors, the Act instructed the Securities & Exchange Commission (the SEC) to propose rules for equity crowdfunding not adopting the idea. However, Instead of waiting on the federal government, a growing number of states have passed legislation to permit crowdfunding inside a state’s borders. Twenty-two states and the District of Columbia have enacted crowdfunding laws and regulations. – i.e., local businesses can raise money from residents of the state.
Is Crowdfunding Right For Your Small Business?
Should crowdfunding be part of the financing plan for your business? Here are a few issues to consider:
- How much money will you need to raise? Many states limit the amount a company can increase to $1 million or $2 million. Needing more than the state limit will require other outside funding.
- How many investors do you want to answer to on your overall board? Except for accredited investors, many investors are generally capped at investing $10,000.00 or less; therefore, you may need several investors to reach your goal. Having many investors will impose much input in the affairs of the business and those who may not fully appreciate the inherent risk in investing in small companies and startups.
Even if crowdfunding does not fit perfectly with your business, or if your crowdfunding campaign is ultimately unsuccessful, it may present a relatively inexpensive way to create buzz for your small business. Please reach out to Enara Law PPLC for more information about contracts and agreements involving crowdfunding or how you would like to set up the proper documents to support this kind of business endeavor. Call Enara Law at (602) 687-2010; they are available twenty-four hours a day, seven days a week. Or email Enara Law at [email protected].