Crowdfunding is nothing new when it comes to raising needed funds for small businesses, new products, nonprofits or even personal needs for individuals. The basic premise is that many people offer up smaller sums of money to help you reach whatever goal you’re raising the funds for. You use your social media network as your “crowd” to help raise the money. There is another type of crowdfunding that is making the rounds now called equity crowdfunding. A recent ruling by the SEC, the JOBS Act, will prove to be a major game changer in the world of small business. Here is a quick look at what this new ruling may mean for you.
Funds for shares
Equity crowdfunding basically allows a company that is not listed on the stock market to raise funds in exchange for shares in the company. That shareholder will then have partial ownership of the company in question and can profit if that company does well. It’s similar to buying stock in the company, without all of the hassle of going through the stock market.
While many business owners were hoping for very high limits with this new ruling, the JOBS Act limits the amount you can raise through equity crowdfunding to $1 million. Of course, that amount of money is nothing to sneeze at, but if you were hoping to be able to raise $5 million or even $10 million, then you may be out of luck.
There are also some limits as to how much a potential investor can actually invest through equity crowdfunding. The JOBS Act limits the amount to either $2,000 or five percent of their annual income or 10 percent of their income if their annual income is more than $100,000. Basically, the limits are to keep investors from over-investing in a new business that may sink or swim, which can be a little frustrating for entrepreneurs.
All or nothing
Much like Kickstarter, if a new company is using an equity crowdfunding plan and does not raise the full amount of their funding goal, the business is not allowed to keep any of the money raised, and they lose any out-of-pocket up-front expenses as well. It’s a very important thing to consider as you’re setting your funding goals, because a poorly run campaign can actually end up costing you money in the long run.
The new JOBS Act is complicated, and there are a lot of things to consider, however, if you do your homework, you may end up finding some very important new investors to keep your small business thriving in 2016.
This article was written by Deborah Flomberg for Small Business Pulse