From time to time, team members will share their views stimulated from a piece by an industry thought leader. Here, our CEO, Lisa Maier, discusses the recent Venture Beat article, “U.S. SEC approves new crowdfunding rules,” and the Entrepreneur article, “The SEC’s new 685-page crowdfunding rules: What you need to know.”
The first article in Venture Beat begins, “U.S. securities regulators approved new crowdfunding rules on Friday, allowing start-up companies to raise money from mom-and-pop investors over the internet. Private companies were previously allowed to solicit only accredited investors – those with a net worth of at least $1 million, excluding the value of their homes, or annual income of more than $200,000.”
That is enough to whip your head around if you are on an entrepreneurial adventure and are fanning the growth flames of your fledgling start-up. And as an investor who has been held back from many early opportunities, this may become a very interesting opportunity. Given that the SEC rules are a whopping 685 pages, the second article is really helpful in that it summarizes the main points:
- This is not like Kickstarter, since selling securities in a business is an extremely highly regulated activity. Compliance with the rules is essential if you want to avoid hefty fines and legal fees to defend yourself.
- Investment under the old regulations required a limited set of accredited investors and allowed for no public solicitation. Now, anyone can invest up to $2,000 – and more if income and net worth criteria are met, and you may advertise freely to offer investment. Investments may be done on SEC-registered funding portal, but the funding round must attain 100% of the funding target to receive the funds, and funding may not exceed $1 million.
- You may still offer the older forms of funding to accredited investors in parallel, but these funding efforts should be kept as independent offerings, without reference to each other.
- Once you hit your funding target, investors can withdraw up to 48-hours in advance of closing, so a strategy to exceed your funding target, which is allowed. If your funding campaign is very successful, you also have the option of closing early with a few day notice to potential investors and the SEC.
- It is crucial to be as transparent as possible with your potential investors: if in doubt, disclose. ANYTHING that may have a wisp of possibility of material impact on your business must be disclosed fully. A cool site that helps you discern what should be disclosed is given: http://idisclose.com/. Check it out, it’s a neat site.
- You’ll need to produce standard financial statements such as cash flow, balance sheet and income statement, so you’ll need to use a product such as QuickBooks, AND you will need to be trained if you don’t know how to use the tool properly, since statements must be accurate.
- Your personal financial information may become publicly available if you are raising less than $100,000.
All in all, this may be worth your further investigation. I know I will certainly watch this closely to see if it fills a gap in the marketspace between family-and-friends investments and the larger angel or venture-backed funding, or perhaps to see if it offers a new intermediate state of vetting that lessens the risk (and cost) for subsequent, larger funding rounds, bringing down the overall cost of innovation coming to market. Pretty cool stuff.