The average person already has some familiarity with crowdfunding thanks to websites like Kickstarter. This and similar sites let individuals contribute relatively small amounts of money to help new businesses purchase the equipment they need to begin operating. For more information about crowdfunding visit http://www.crowdfundconnect.com
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Equity crowdfunding rules legislation in progress
1. Equity Crowdfunding Rules: Legislation In Progress
The average person already has some familiarity with crowdfunding thanks to websites
like Kickstarter. This and similar sites let individuals contribute relatively small amounts
of money to help new businesses purchase the equipment they need to begin
operating.
There aren’t many rules for Kickstarter crowdfunding. There are, however, a lot of
equity crowdfunding rules. It’s important to have a basic grasp of crowdfunding law
before getting involved in the industry. If equity crowdfunding regulations elude you,
then you may find that it’s difficult to stay within the law.
2. Laws that Affect Crowdfunding
Forbes contributor Wil Schroter notes that the Jumpstart Our Business Startups
Act (JOBS Act) contains several passages that affect crowdfunding law. The
Securities and Exchange Commission (SEC) is charged with enforcing equity
crowdfunding rules. The SEC is also in charge of regulating securities sales and
other investment vehicles.
Currently, there are two sections of the JOBS Act that make equity
crowdfunding legal.
Title I of the JOBS Act makes it easier for businesses to go public via an initial
public offering (IPO). Title I also exempts some companies from disclosing
information that has discouraged companies from going public in the last
decade.
Title II of the JOBS Act streamlined communications by letting companies use
general solicitation to attract investors. Before this regulation, business leaders
often had to travel extensively to find accredited investors interested in their
securities. It took long periods of networking to find the right investors. Title II,
however, made it legal for companies to advertise on television, billboards, the
Internet, and practically every other media platform. This puts companies in
contact with potential investors who have relatively little money compared to
accredited investors and institutional accredited investors.
3. Potential Laws That May Influence the Future of Crowdfunding
In June 2014, Slate reporter Jim Saksa noted that, while the JOBS Act gave the
SEC 270 days to finalize the rules that would regulate crowdfunding, nothing had
been solidified after 800 days. Despite passing the deadline long ago, businesses
interested in equity crowdfunding still don’t know how the new rules could
affect them. Saksa laments in his article that the proposed changes to equity
crowdfunding would allow investors who do not have enough expertise to
participate in the industry. He also worries that making it easier for everyday
people to invest their money would do little more than separate people from
their savings.
Not everyone shares this dour opinion. According to Entrepreneur contributor
Kendall Almerico, some people see equity crowdfunding as an exciting way to
revive the American Dream. By letting people purchase securities, hopeful
entrepreneurs believe that they can give average people opportunities to
generate money by investing a portion of their savings in securities. Regulation D
currently defines accredited investors as those who have at least $1 million in
assets, not including the value of their primary residences.
That’s much more than the average person has. Opening the door to
crowdfunding could enable more people to benefit from the same opportunities
that have helped generate more wealth for rich families.
4. Potential Laws That May Influence the Future of Crowdfunding
Most people in the industry agree that enacting proposed laws would open a
new source of capital that would benefit businesses and individual investors.
Until Congress and the SEC can decide exactly how those laws will function,
though, no one knows exactly what the industry will look like in a month, a year,
or a decade. There is considerable hope, but also some hesitancy.
The most pressing laws under review include Titles III, IV, and V of the JOBS Act.
Title III will let companies sell securities to non-accredited investors who have
never had access to these opportunities. Title IV and V contain language that, if
finalized, would address further initiatives that would make it easier for
companies to raise capital through streamlined, more personalized processes.
When can investors and businesses expect a finalized set of rules? Probably not
until Congress meets again after the holidays. Whether that happens, though,
will likely depend on several factors, such as how mid-term election winners
want to influence the economy and whether Congress gets stuck debating other
issues.
5. Legislating and Regulating the Crowdfunding Industry
The SEC regulates the crowdfunding
industry. It also regulates other
areas of the investment industry.
Congress, however, creates the laws
that regulate investment.
Congress gives authority to the SEC to regulate the industry. It also recognizes
that the SEC has authority and expertise that most agencies lack. The SEC,
therefore, provides significant input to members of Congress developing new
regulations. When the SEC reviews legislation, it can provide feedback that
influences how Congress finalizes rules and what language lawmakers
include.
6. Alternatives to Crowdfunding
Changes to crowdfunding regulations could inject money into
developing businesses that need more capital to grow. The JOBS
Act looks promising, but it’s difficult for anyone to know how the
industry will change after all sections of the Act have been
finalized. This uncertainty encourages some people to explore
alternatives to crowdfunding.
There are several alternatives, and some are more popular than
others. The options that match one business’s needs may not meet
the needs of another. This makes it important for organizations to
review their financial needs so they can make informed choices
when soliciting money from investors.
7. Accredited Investors
Accredited investors are one of the most reliable options for businesses that want to
raise capital by selling securities. According to Regulation D, an individual qualifies as
an accredited investor if he or she:
•Has earned at least $200,000 per year for the last two consecutive years.
•Has a combined spousal income of at least $300,000 per year for the last two
consecutive years
•Has at least $1 million in assets, not including the value of the person’s primary
residence.
There are several advantages to focusing on accredited investors. These investors have
more money than the average person, so they can contribute more to the businesses
that they believe will generate large profits. Businesses that sell securities exclusively
to accredited investors may also be exempt from providing extensive information
about the risks of buying securities and similar vehicles. Accredited investors are
expected to know how to choose their investments carefully, so companies don’t need
to reveal as much information when soliciting them.
8. Institutional Accredited Investors
Institutional accredited investors often have even
more money to invest in growing businesses. Most
institutional accredited investors must have at
least $5 million in assets. They may also need an
individual accredited investor who makes
decisions for the institution. Since institutional
accredited investors have access to large amounts
of money, they can significantly influence which
companies get the capital they need to grow and
succeed.
9. Business Loans
Businesses that cannot raise equity by selling securities via
crowdfunding, accredited investors, and institutional accredited
investors may need to explore business loans that will give them
access to the capital they need to grow. Loans, of course, come
with interest rates. Companies must repay their loans plus interest.
If the business’s plans work and it profits from the loan, then this is
a good option. Unfortunately, businesses that don’t succeed may
have difficulty repaying their loans.
Crowdfunding rules and legislation may have created uncertainty in
the industry, but it’s still a useful option among several equity
funding strategies.
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