Crowdfunding as a means of raising capital has only recently achieved popularity, but in the past two years, it has soared into prominence as one means of generating revenues for the business. However, all the excitement associated with crowdfunding doesn’t really match up well with the reality of what it generally achieves. It seems that there is a major disconnect between the public perception of crowdfunding, and what it can actually provide to business entrepreneurs.
The Social Media Solution
The funding option which has exploded into prominence over the last two or three years is made possible by the vast reach of social media, which has made it entirely feasible for unknown entrepreneurs and unknown ideas to gain instant attention and support. However, when crowdfunding was considered by Congress as part of the JOBS Act, a number of legal and regulatory procedures were imposed on it, which were much different than what was originally proposed by its backers. When it got through Congress, it had acquired a number of undesirable features which tend to nullify much of its value as a public fundraiser.
Legal and Regulatory Aspects
First of all, any crowdfunding initiative cannot exceed a cap of $1 million in any one year period, and any shares issued in a crowdfunding transaction must also be subject to that same 12-month time frame. Investment companies, public reporting companies, and non-US companies are not eligible to participate in crowdfunding. No single individual can invest more in a crowdfunding initiative than 10% of their annual net worth or net income.
All crowdfunding must take place through a registered funding portal, or under the auspices of a registered broker-dealer. Anyone participating in crowdfunding must file a disclosure document with the SEC at least 21 days prior to initial sales. No advertising is allowed with crowdfunding, other than to direct potential investors to the funding portal. Any company which is involved with crowdfunding must submit annual reports to the SEC, and may also be required to submit more frequent reports.
While crowdfunding continues to excite the popular imagination as a funding option, the reality of legal requirements has made it much less attractive than what it started out to be.
Want to raise capital without crowdfunding?
As glamorous as crowdfunding has become these days, it’s not always a good solution for raising capital. If you’d like to try a more business-like approach, contact us at Impact Commercial Capital, and let our finance specialists work with you on a plan for funding.