You can now raise capital from true "strategic investors" who are unaccredited (net worth less than $1MM). By Dana Mauriello (Co-Founder & President, ProFounder)
A crowdfunding bill was signed into law by the President this spring as part of the JOBS ACT (H.R.3606) and has the potential to fundamentally disrupt the way that businesses raise capital.
The bill is currently with the SEC for rule-making and won't be ready to be used by entrepreneurs for at least seven months, but I wanted to share some basic information about what the bill entails and what it may mean for you so that you can start to educate yourself on it (and potentially plan its implications for your business) in advance.
What does the bill say?
- Entrepreneurs can raise up to $1MM annually from as many investors as they would like from the general public- there are no restrictions as to who can be an investor in this scenario.
- Investors can invest a tiered amount depending on income: the lesser of $2K or 5% of income if their income is less than $100K, or 10% of their income if their income is over $100K. No investor can invest over $100K. All of these limits refer to the amount an investor can put into all crowdfunding raises in aggregate in a single year.
- Raises are all or nothing - in other words, the entrepreneur must set a goal and will only get his or her capital if that goal is reached. The goal can be exceeded.
- The terms of the agreement may be equity, debt, convertible debt, or any other securities structure that the entrepreneur and investor agree to.
- Entrepreneurs must file financial information annually with the SEC.
- Entrepreneurs raising over $100K must have their financial information certified by an accountant and this information must be certified by an auditor if they are raising over $500K.
- All fundraising must be done on a registered crowdfunding portal.
- Entrepreneurs can advertise the offer as widely as they would like so long as general advertisements only contain a basic statement that they are raising capital on a crowdfunding portal and more substantive information about the offer is communicated solely via the portal itself.
- Entrepreneurs must have a business that is incorporated in the United States before their fundraising begins.
- Investors can transfer their stock after holding it for one year.
- Investors obtained through the crowdfunding exemption do not count toward investor limits imposed by other securities laws (such as the limit on the number of stockholders can have before being considered a de-facto public company).
- Entrepreneurs must disclose their business plan and all financial information in their fundraising pitch on the portal to any potential investors.
- Portals can not endorse specific deals, solicit investors for a deal, or provide investment advise (unless they pursue specific broker dealer registration). Similarly, entrepreneurs can not pay another individual to promote their offering.
* Note that the SEC has the authority to add rules that are intended to be clarifying in nature during their rule-making period.
What does it mean for entrepreneurs?
A big opportunity.....
- You can now raise capital from true "strategic investors" who are unaccredited (net worth less than $1MM) - for example, if you are starting a business for moms, you may want a top mommy-blogger to invest so share her expertise and become a loyal marketer.
- You can raise capital earlier in your business for prototyping or market testing before getting a valuation from professional investors.
- You can raise capital from the people who believe in you most - for example, any of your classmates or Stanford alumni.
- You can set your own terms and see what the market will bear.
- You can use crowdfunding as a way of simultaneously marketing your business to would-be customers.
- You can promote customer loyalty by making customers investors as well.
- You can use crowdfunding as a way to market test the demand for your business.
- You can raise capital from the community alongside professional investments and obtain more capital in aggregate.
....balanced with challenges:
- You need to disclose your financial information to anyone who you are asking to invest - if you'd like to share your investment opportunity to the general public, this means making all of your financial information public online.
- You need to ensure that you have chosen appropriate terms, numbers, and types of investors such that future investors in subsequent rounds see the value of your crowdfunding efforts and are not scared off by it.
- While portals will help expose you to investors, you still need to do some work to actively market your deal.
- You need to manage many investors during the investment process and after it is complete.
- You need to incorporate first before beginning fundraising.
- If you are raising over $100K, you need to have your financial statements verified by an accountant.
- You need to file your financial information annually with the SEC and your investors.
- Your investors can sue you personally for material mistakes and omissions in your offering materials.
Entrepreneurs, what do you think?
Would you use crowdfunding? How? Why?
Investors, would you invest?
Food for thought: What if there was a Women 2.0 Angel Group that included non-accredited investors like you and your fellow entrepreneurs and its members expressed interest in investing $5MM total in Women 2.0 run startups this year?
You can set your own terms and apply for funding from the group using their online application. Those in the group can confer and make their individual decisions to invest in your deal directly online.
Entrepreneurs, would you apply for funding from this group?
Investors, would you invest via this group?
Editor's note: Got a question for our guest blogger? Leave a message in the comments below. Photo credit: 401K on Flickr. About the guest blogger: Dana Mauriello was the Co-Founder and President of ProFounder, a crowdfunding platform that provided tools for entrepreneurs to raise investment capital from their communities. She has testified twice as a Congressional expert witness on Crowdfunding and played an active role in the shaping and passage of the Crowdfunding Bill of the JOBS Act. She currently consults on innovative financial and entrepreneur services. Follow her on Twitter at @danamauriello.