Equity Capital & Crowdfunding
ISSUE BRIEF
2015 Small Business Congress | Economic Development | Access to Capital
Small-business owners need improved access to various kinds of financing and investment
Problem:
One of the most prominent challenges for small businesses is raising adequate seed capital to launch new ventures. Entrepreneurs have traditionally relied upon funding from capital providers such as banks, venture capitalists, angel investors, as well as contributions from close friends and family members. However, recently a new source of financing has emerged in the form of “crowdfunding.” Crowdfunding represents a form of informal venture financing that allows entrepreneurs to directly appeal to the general public through online platforms for help in getting their innovative ideas off the ground. In May 2016, Title III provisions of the Jumpstart Our Business Startups (JOBS) Act of 2012 authorizing equity crowdfunding went into effect. The regulation allows small businesses to raise up to $1 million per year, through intermediaries facilitating crowdfunding transactions. While the new rules allow average Americans to engage in crowdfunding, they will not have unfettered access. According to the regulations, an individual investor may not contribute more than $100,000 in any 12 month period across all crowdfunding offerings. However, the vast majority of Americans will face limits much lower than that, largely dependent upon their income and assets. Although it took the SEC three and a half years to issue the final rules on Title III, there are still problems. One of the major concerns around Title III is the high transaction costs required to raise $1 million. Issuers will find themselves with bills in the tens of thousands of dollars right out of the gate to pay for legal and accounting services—and will then have to spend at least a couple thousand dollars after fundraising to comply with ongoing reporting requirements. Another major limiter is the maximum investor cap of $100,000. This cap is the same regardless of whether an investor is accredited or non-accredited, and it will only make it harder for issuers to reach their funding goal. Additionally, transactions must be conducted through an intermediary that either is registered as a broker-dealer, or is registered as a new type of entity called a “funding portal”. A funding portal must register with the SEC, and be subject to the SEC’s oversight. Furthermore, for companies that raise over $500,000, significant disclosures in the form of audited financials are required, which can put small businesses at a competitive disadvantage.
Solution: NSBA was an ardent supporter of the JOBS Act and its potential to transform the ability of small firms to access the capital they need to grow, to innovate and to create jobs. With better underlying legislation and better implementing regulation, investment crowdfunding might have provided a useful contribution to capital formation for the smallest companies. Properly done, crowdfunding would provide small, quick injections of funds into very early stage or very small companies. NSBA is urging lawmakers to intervene and require the SEC to issue rules in-line with the intent of the law and avoid creating costly new regulatory regimes in the process. NSBA supported legislation that passed the House during the 114th Congress, the Fix Crowdfunding Act (H.R. 4855), whose provisions are laser focused on jumpstarting Title III, including provisions to raise the annual offering ceiling from $1 million to $5 million, allowing special purpose vehicles (SPV’s), or syndicates, to aggregate investors into a single investing group, with a sophisticated lead investor, and allowing a company to “test the waters” for its proposed offering, to both generate interest and gauge potential investor sentiment.
Learn More: Read NSBA’s Access to Capital Survey Download NSBA’s Access to Capital White Paper
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