Cash from the Crowd

New concept for start-up capital

By Erica Rascón on Jan 3, 2014 in News

The Securities and Exchange Commission has proposed rules that would permit small companies to seek funding from the general public.

Crowdfunding has grown in popularity among artists and inventors. Companies that create home security gadgets, tiny appliances for micro-apartments and sustainable furniture have all received public funding via platforms like Kickstarter. If the proposed rules pass, fledgling housing industry companies can get their businesses off of the ground with the help of the upper middle class.

Under the new rules, companies could raise as much as $1 million each year from the public. Shares can be sold in face-to-face transactions and through online funding portals, similar to Indiegogo and Wefunder but with more stringent regulations. Such opportunities could help small companies gain quick access to capital, increasing the success rate of startups.

For Startups

The new source of funding couldn’t come at a better time. As the nation recovers from the recession, many are regaining the confidence needed to step out and fulfill their entrepreneurial goals. They can’t afford to vie for the generosity of a few accredited investors, entities whose net income exceeds $1 million. Startups are looking for more easily accessible investors and they are in luck. Many Americans, eager to shrug off recession woes, are seeking new ways to make their money grow. The time is ripe to unite these entrepreneurs and new investors.

The proposed changes are not an entirely new idea. The JOBS Act outlined regulatory guidelines that paved the way for crowdfunding. The act also forged the trail for funding portals, third-party internet-based platforms for offering and selling shares. These portals will not be registered as brokers, nor can they offer insights or suggestions on investing.  They operate without SEC approval. This is great news for businesses hoping to avoid SEC processes and costs.

For investors

A lack of SEC accreditation doesn’t mean that investors will flounder on their own. The new rules will have provisions to protect investors. These limitations are meant to keep excited optimists from tossing everything into a ship that might sink.

• Investors whose net worth and income are less than $100,000- contribution must be less than or equal to $2,000 or 5 percent of their annual income or net worth, whichever is greater.
• For investors with a net worth or annual income greater than $100,000- contribution must be less than or equal to 10 percent of their annual income or net worth.
• These regulations renew each year and no annual investments can exceed $100,000.

The above limitations protect investors while providing room to grow. The proposed rules could be a great opportunity for the average person to invest, increase their net worth, and become more involved with businesses that they believe in.

Yet even when investing on a smaller scale, it is important to invest wisely. Forbes issued a helpful list of 9 Things You Need to Know for Startup Investing. Six out of nine points include research. Whether you’re investing $1,000 or $100,000 thorough research will help you identify which startups have a fighting chance at giving you great ROI.

Also, speak with your personal financial adviser. If the new rules pass, they will only change who can invest and how, not the fundamentals of investing. Your financial adviser will be able to make suggestions and recommendations that could be helpful in your new venture.

The SEC will receive public comment on the proposed rules until the end of January 2014.  Then the Commission will determine whether to adopt the proposed rules.