May 13, 2016 (LBO) – This month the U.S. Securities and Exchange Commission will begin implementing equity crowdfunding for the average investor. This will allow small companies to directly raise debt or equity capital from friends, family, and interested investors.
It’s the final piece of landmark legislation called the Jumpstart Our Business Startups Act, popularly known as the JOBS Act, that was passed in 2012, according to a CNBC report.
One of its provisions allows new businesses to raise capital directly from private investors. Initially, only accredited investors — those with $1 million in net worth or who earn at least $200,000 per year — were allowed to invest in start-ups.
The new law will allow individuals to invest in start-ups regardless of their income or net worth, though there will be limits on how much can be invested. Compared with a Kickstarter project, where you don’t have equity in the company, with equity crowdfunding, investors have an ownership stake, with a share of the profits.
One protection offered for investors is that companies must present their offers through an investment portal which can be run by a registered broker-dealer or through a portal approved by the SEC. They will have a responsibility to at least reasonably believe that the issuer is presenting factual information in compliance with relevant laws and regulations.
Recent equity crowdfunding portals that have gone active include Zacksinvest, Circleup, and SeedInvest.
There will be a limit of 1 million dollars over a 12-month period that can be raised, which means local services like restaurants and real estate will be likely users.
Daniel Mulcahy, who manages the Zacksinvest portal, gives the example of a builder who wants to buy a lot in his town and put up an apartment building.
A bank might be willing to lend, 60 percent of the loan, but the builder might have to come up with the remaining 40 percent. That would be perfect for crowdsourcing, he says. Another potential group is early tech start-ups. Mulcahy estimates that 90 percent of the time investors will get paid back via a buyout.
One factor going for equity crowdfunding is that information is much more readily available than it used to be due to the internet, the article states. Companies using crowdfunding portals will be required to make disclosures — they will need to file a Form C, an initial disclosure form, and regular updates on the status of the fundraising efforts.