How Much Can Folks Invest?
People who have an income of less than $100,000 annually are permitted to commit the greater of $2,000 or 5% of the income each year. People with an income of over $100,000 can invest up to 10 percent of earnings, with a maximum investment of $100,000. Formerly, only accredited investors — people who have a high net worth or income — could invest in start-ups.
The SEC received 480 comments on its proposed regulations and made just 1 change to its draft principles. Initially crowdfunding companies were to have to supply the results of a complete financial audit, which may be costly. The final rules include an exemption from the audit requirement for first time crowdfunding issuers. Instead, entrepreneurs can offer specific information in their tax returns which have been”reviewed” with an independent tax accountant.
Instead, entrepreneurs can offer specific information in their tax returns which have been”reviewed” with an independent tax accountant.
The limitation on how much a business can increase in a year remains at $1 million, a significant disappointment to the startup community. Many comments were filed indicating a higher limit and the SEC did say in a press release that it would finally suggest a $5 million limit. The agency also said that it would initiate changes that would make intrastate crowdfunding simpler. While the SEC dithered over national rules, over 25 countries have implemented intrastate crowdfunding, with many following the national rules but several have greater funding limits and less rigorous accounting requirements.
Over the past two decades, the SEC has make regulatory changes which make it easier for start-ups to raise cash from accredited investors. The first change allows for public solicitation of funds on portal sites. SEC Rule 506, Regulation D allows general advertisements for personal security placements to accredited investors as well as 35 non-accredited investors who meet specific requirements. Websites, social networking, papers, and email are methods of soliciting funds.
Many portals have sprung up, such as:
- CircleUp (concentrate on food companies );
- EarlyShares (property );
EquityNet is among the several equity crowdfunding platforms.
Kinds of Crowdfunding
Reward-based. For ecommerce companies — both merchants and applications suppliers — rewards-based crowdfunding is a difficult sell. Individuals who donate favor tech gadgets and creative jobs. Finding rewards that are related to your company and are appealing to those who contribute is challenging. The upside of this sort of crowdfunding is that if you can make it work, you do not give up any ownership rights to your enterprise.
Equity. This is most likely the better approach for ecommerce start-ups and established companies. However, you’ll be diluting the ownership of your company with this approach.
Non-accredited investors. Crowdfunding from small unaccredited investors is certainly more democratic and you’ll be dealing with individuals that aren’t business experts. The drawback is that you might be dealing with hundreds of stakeholders and that can be an administrative headache. You’re restricted to raising $1 million annually. This might just be seed financing and you might want to move on to a different source of funding in the future.
Initially there might be a lack of liquidity, because there’ll be a one-time waiting period prior to any investor will be permitted to liquidate or sell their shares to an external party. Even then, there’ll probably be restricted secondary markets.
Accredited investors. The major advantage with increasing funds from accredited investors is that you’re not limited to $1 million yearly. Fees and due diligence costs still exist, but if you’re raising several million dollars, these might be a smaller proportion of the general raise. Obtaining funds through an intermediary portal is more efficient and less time consuming than making individual presentations to a single venture capital or angel investment company after another.
Accredited investors are usually sophisticated people who invest in several companies. Angel investors often pool their money and invest as a syndicate. Some licensed traders focus on particular industries and lots of ecommerce companies have received funding from accredited investors.
AngelList is most likely the most popular portal for ecommerce businesses. A lot of people who have started their own businesses and become wealthy are active investors on AngelList, both investing their own money and fronting syndicates.
Accredited investors might want to have more of an active part in running the business than non-accredited investors. Furthermore, they might want to get their money out in a shorter timeframe. Several companies which were funded this way have gone on to find venture capital funding or launching an IPO.
Indiegogo is supposed to be considering expanding into equity crowdfunding but Kickstarter has said it won’t pursue it. Hopefully, by the end of 2016 there’ll be a vibrant equity crowdfunding infrastructure.