What the New Crowdfunding Law Means for Small Business Owners

For the past few years, crowdfunding has been a way for creative types to raise money and get their ideas produced. If you had, say, a film idea or an invention, you’d post a profile page on a crowdfunding website like Kickstarter or IndieGoGo to solicit capital in exchange for recognition, a small gift or pre-sale of the item (not shares of ownership). If you met your fundraising goal, you’d keep the pledged money. If you didn’t, you’d get nothing.

But small business owners who wanted to crowdfund by offering shares of their firms couldn't do so — until now.

Already, a slew of new crowdfunding platforms that will take a cut for assisting small businesses — Crowdfunder.com, EarlyShares.com, and FundingLaunchPad.com, to name a few — have been announced. (I’m averaging about two such announcements in my inbox each day.)

So, what does all this mean for your business?

It’s a little early to know much, since the SEC still needs to spell out rules to entrepreneurs who want to crowdfund.

But once that happens, crowdfunding could help you find money in today’s tight credit market. (I blogged about other ways to scare up cash in an earlier post: “5 Places to Find Money for Your Small Business.”)

If you think you might want to use crowdfunding to grow your business, be cautious. Remember: You’ll be giving up part ownership of your company. That means that other people will have a say in what you’re doing and you'll need to set up a way for them to weigh in on matters concerning the direction and management of the company. If you offer up more than 50 percent of your business through crowdfunding, you’ll actually surrender your decision-making power.

Beyond that, if you sell shares through crowdfunding, you might also have a harder time attracting venture capitalists or other investors in the future, says Mark Heesen of the National Venture Capital Association. These potential funders may feel that your company has too many shareholders, which could be a headache for them.

But, please, I implore you: Do not log onto a crowdfunding platform online and start selling off shares of your company without understanding how much your company is worth as well as your short- and long-term financing needs.

Landsman cautions business owners planning to crowdfund to “shop around” and make sure that fees for the service are reasonable. He also says you should ask the company offering crowdfunding how it is complying with SEC rules, such as disclosures to investors.

Once it’s clearer exactly how equity-based crowdfunding will work, what it will cost and which sites are emerging as leaders in the field, I’ll be back with more information and advice.