Businesses can now offer equity to investors of all sizes through crowdfunding campaigns. We discuss what that means, and how it could impact new firms.
Anyone who has contributed to a traditional crowdfunding campaign knows that donating often brings certain rewards — usually a product sample or fun keepsake, given as a token of appreciation from the campaign’s host. But as of today, fundraisers can offer something much bigger: a stake in their company.
Until now, United States law stipulated that only people with yearly incomes exceeding $200,000 or net worths over $1 million could partake in such investment opportunities. But a legal change now welcomes practically anyone with the means and desire to buy into a venture to do so via crowdfunding websites.
It’s a shift that could to mean great things for entrepreneurs — women in particular — who often struggle to access necessary startup capital through more traditional methods.
The change comes thanks to Title III of the Jumpstart Our Business Startups Act, or JOBS Act, which was signed into law by President Barack Obama in 2012. “Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors — namely, the American people,” Obama said at the time. “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
Though Congress passed the law 4 years ago, the Securities and Exchange Commission took its time ironing out the details. In fact, the final rules weren’t released until October of last year.
What are those rules? People who pull in less than $100,000 in annual salary can invest, but no more than 5 percent of their annual earnings, or $2,000, whichever is greater. Those who earn more than $100,000 can make larger investments. All investments must be solicited and secured through specifically designed crowdfunding sites, which include AngelList, CircleUp, Crowdfunder and Portfolia.
Caveats aside, there is huge potential for entrepreneurs who hope to raise more money than what’s typically generated by rewards-based crowdfunding campaigns. Statistics from Kickstarter show that the majority of successful campaigns pull in less than $10,000 — a fine amount for launching a new product, but not early enough to get a new venture off the ground.
For female entrepreneurs who have struggled to secure startup funding, the change offers an avenue that bypasses the difficulties often experienced taking more traditional routes. In fact, women are already finding success through equity crowdfunding.
“As of 2014, women-led businesses closed their rounds successfully at a 21 percent higher rate than men on the platform,” Ryan Caldbeck, founder and CEO of equity crowdfunding site CircleUp, told the National Women’s Business Council.
We at The Story Exchange are fans of female crowdfunders — we even have a bi-weekly column celebrating their efforts — and we look forward to seeing how well this new money-raising opportunity works for women business owners.
Posted: May 16, 2016