Crowded Funding: Ahead of SEC, Small Business Investing Gets Busy
by Joe Mont
Sometime early next year, the Securities and Exchange Commission is expected to propose rules that would pave the way for “equity crowdfunding,” harnessing the groupthink of social media as a tool for capital investment.
Small public companies (those with revenues of less than $5 million) could be able to raise up to $1 million using this approach to sell stock or promote revenue-based financing. Even ahead of those regulations, however—foisted upon the SEC by the JOBS Act—some companies are trying to get ahead of the crowdfunding race, through a careful parsing of Regulation D exemptions and state securities laws and adapting the “reward” based model already in use.
Among the Websites already running is Bolstr.com. Co-founder Charlie Tribbett says the service, which launched last month, aims to serve the neglected market for small business capital. This market, typified by the sort of no-interest loans hashed out over a dinner table, is estimated at about $50 billion a year, he says, with tremendous growth potential.
The catch? The forthcoming rules for crowdfunding platforms will only allow them to solicit donation-based capital from investors. So Bolstr acts only as a middleman—it transfers no money directly from investors to a business. Instead, it serves as the platform for companies to launch their own fundraising efforts. The process, however, is a bit more complicated than that may sound. “We ended up doing a state-by-state blue sky regulatory analysis and incorporated all the current securities laws into a technology platform,” Tribbett says. “The software will tell [companies] exactly what they need to do to stay in compliance with those regulatory laws of the state the investor resides in.”
The system, he says, uses the Regulation D exemption that allows small-business owners to conduct a private offering with both accredited and non-accredited investors. Other efforts have traditionally worked exclusively with accredited investors by registering as a broker-dealer or partnering with one. But it isn’t economically feasible to be a broker-dealer and help businesses raise sums of $25,000 or less, Tribbett says.
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