Crowdfunding is gaining a lot of press. The SEC has finally come out with proposed rules and regulations to allow companies to raise growth equity through crowdfunding. But is that the answer for most entrepreneurs in search of capital?
It’s very important to distinguish between “investment crowdfunding” and “direct investor solicitation”. Most people think of Kickstarter or similar web sites when thinking of “crowdfunding”. On these sites, an entrepreneur may raise some capital as donations, giving investors back product or other promotions, but not equity in the company. Generally the amounts raised are small.
“Investment crowdfunding” rules were just issued by the SEC in October and won’t be effective until May 2016. In investment crowdfunding, companies will be able to raise up to $1 million per year, and unaccredited as well as accredited investors can participate.
While that’s a move forward and will surely seed a lot of companies, most existing companies that have proven concepts need more than $1 million in $5,000 or $10,000 increments.
The JOBS Act also opened the door for “direct investor solicitation”. Before the law changed, companies could not “solicit” for investment. As an example, a company could not run an ad in the Wall Street Journal saying they wanted to raise $5,000,000 in equity.