In the past, small businesses couldn’t sell shares of their company through crowdfunding sites to raise money, because it violated Securities and Exchange Commission (SEC) rules. But all that changed last week when Congress passed the JOBS Act (JOBS stands for Jumpstart Our Business Startups), allowing what’s known as equity-based crowdfunding. President Barack Obama signed the law today, and it is likely to take effect over the next few months.
Once the law takes effect, business owners will be able to set up crowdfunding profile pages on online platforms and offer shares of their companies in exchange for cash from investors. Anyone making less than $100,000 will be allowed to invest up to $2,000 or 5 percent of their annual income or net worth (generally excluding the value of your primary residence), whichever is more. People with income or net worth exceeding $100,000 will be able to invest up to 10 percent of that amount, but no more than $100,000. Entrepreneurs will be able to raise up to $1 million annually without registering shares with the Securities and Exchange Commission; up to $2 million for companies that release audited financial statements.
Although the bill passed Congress overwhelmingly, some detractors, including consumer advocates and regulatory groups, fear that the new, relaxed regulations could lead to securities fraud.
Larry Landsman, a partner at the Chicago law firm Block-Landsman, worries that selling equity could be risky for entrepreneurs who don’t understand securities laws. “Some businesses fail," he says. “The last thing you want to have happen if your business goes under is to deal with lawsuits from unhappy investors who feel they weren’t properly informed of risk.”
How Crowdfunding Could Help You
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.”)
The key to crowdfunding successfully will be carefully valuing your business, both today and by projecting its value out for a few years. That way, you can price your crowdfunding shares accordingly. Your accountant can either help with the valuation or suggest professional business valuation experts you could hire.
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