Equity Based Crowd Funding
On April 5, 2012, President Obama officially sealed the JOBS Act. His signature on this new legislation marks a new beginning for the securities regulation industry. Specifically, it softens restrictions and lowers hurdles for small businesses to raise funds, primarily through equity based crowdfunding (alternately “equity based crowd funding”). This is a procedure which consists of combining individual investments of smaller sizes to meet bigger financial goals for smaller enterprises.
America has 6 million formal, small businesses in existence today. Most of these companies are not positioned to take advantage of angel investors, funding groups and investor cells like those most-often associated with Silicon Valley. It’s these other enterprises that will benefit from the JOBS Act and the permitted policies and procedures under its umbrella.
Between the early 1990s and 2009, smaller companies created approximately one-third of new jobs in the United States (65%). It’s clear these entities are the force behind America’s continuous growth. But that force needs fuel in the form of dollars; and if smaller companies can’t secure operating and growth capital, the unemployment rate will suffer in 2012 and beyond.
With traditional financial enterprises holding fast to their purse strings, small businesses are finding it an arduous, often insurmountable, process to raise money to simply stay afloat. The government thought it had a solution: the creation of the Small Business Lending Fund. But banks had a different use for the fund; they poured over half ($2.2 billion) of the $4.0 billion disbursement in 2011 into TARP debt, instead of intended small business lending. This left a great number of small businesses without viable capital solutions.
Many small outlets have turned to credit card borrowing — which is fast-becoming a financing solution of the past. A great number of banks have lowered credit card limits significantly, and others have canceled business credit lines altogether, often with little notice to cardholders. Some entrepreneurs have tapped friends and relatives for funding, a tactic with its own limitations and pitfalls. A small percentage of enterprises have the option of using equity financing. However, unless a company is part of the life sciences or high technology industries, equity financing is not a viable option. More than 70% of venture capital funding expended in 2011 went to high tech and life sciences type businesses and organizations.
Finally, small businesses have been thrown a lifeline by crowdfunding and the JOBS Act, which provides a new source of funding for small businesses. Through this legislation, the investor pool can quite possibly shift from the accredited investor (1 percent) to, according to President Obama, “the American people.” The pouring in of new investors will not only arm small businesses with new money; it will provide them with new perspectives and new sources of ideas for strategic planning and growth via partnerships with their shareholders.
Investment organizations of varying themes are already forging trails, especially on the internet. Niche investor cells poised to act are positioning themselves to focus on specific interests to capture the attention of small entities. For example, businesses and investors with common interests, such as socially conscious businesses, or local community, can be connected via formal platforms. Smaller companies now have a greater pool for capital, and a plethora of sounding boards for new ideas.
It’s common knowledge small companies are America’s lifeline. But their ability to generate capital needed to sustain and grow has been stifled by arguably the worst financial crisis since the Great Depression. But the JOBS Act and crowdfunding will go a long way in helping these enterprises overcome capital access problems; and, it will prove beneficial to investors by providing promising investment opportunities. This is a win-win for enterprise and the economy in America.
ATTENTION: Get a Legal Overview on Crowd Funding and the Jumpstart Our Business Startups JOBS Act. If you are looking top raise money for your small business watch this FREE Presentation on Crowd Funding.