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Crowdfunding: The Latest Option in Small Business Investing

Crowdfunding for Small Business InvestingWhen you think of crowdfunding, websites like GoFundMe, Kickstarter and Indiegogo probably come to mind. Yet, despite the unparalleled reach and reputation of these popular crowdfunding sites, most entrepreneurs don’t view them as a practical solution for attracting the kinds of small business investors they’re looking for.

If rewards-driven crowdfunding isn’t on your company’s radar, there are other options available to both owners and entrepreneurs that may be a fit in terms of an investment crowdfunding opportunity. In fact, among the alternatives approved by the SEC for business owners, another was added to the list in May 2016.

So what does this mean for you as a business owner? Simply put, it means there are plenty of prospects for companies that are still feeling the pinch of the recent recession, as well as for those gearing up for new growth. And one of these options might be the opportunity you’ve been looking for.

Non-Equity Crowdfunding

Like those sites mentioned above, platforms that utilize non-equity crowdfunding offer one-time investments in what is typically a solo event or project. This means that once the entrepreneur’s investment goals are met, and contributors are rewarded for their involvement, the campaign ends—and often unceremoniously unless your campaign manages to go viral.

While this type of crowdfunding usually centers around products, its “incentives for investments” structure means that contributors walk away without a stake in the company. And for most small businesses, though giving up equity is sometimes a hard pill to swallow, getting funded doesn’t necessarily mean having someone who’s invested in the company’s future.

Equity Crowdfunding

When the Jumpstart Our Business Startups (JOBS) Act was signed into law in April of 2012, it promised the arrival of crowdfunding for businesses at every stage of growth. Up until this time, Regulation D had provided the principal guidelines for small business investing, where offers to sell securities had to be approved by the SEC after the owners registered with the agency and met a long list of qualifications.

Yet, just four years after the JOBS Act was signed, Title III of the act’s Regulation CF went into effect, allowing equity crowdfunding to finally get its due. For a look at the precise qualifications the SEC requires for owners and investors, you can take a look at the Financial Industry Regulatory Authority’s article on the subject.

But how can Regulation Crowdfunding help your business? To answer this, we spoke with the owner and founder of Hubbard Business Crowdfunding, Bill Hubbard, on our radio show The Second Stage, where he spoke about today’s Investment Crowdfunding, which now includes non-accredited investors.

The real challenge has been—and this has been a great number of the clients through the years that I’ve represented—is they have a passion for their business. They’re honorable, they want to do the right thing, they wouldn’t mind having investors, but they don’t have the capability financially to run the business, make the business investments that are needed, and then spend the money on attorneys and accountants to put together a securities offering in traditional fashion, [which includes] going out to [accredited] investors and seeking funds that way.

Yet the SEC has, for the first time in my lifetime, made it realistically doable for an honorable entrepreneur…to ensure that [non-accredited] investors get a decent return…[thus making] it a realistic probability to raise the funds.

Essentially, this means that businesses who have interested parties can raise up to $1,000,000 from these investors under the passing of Title III of the JOBS Act using various online platforms. Its limits, as detailed in the SEC’s Regulation Crowdfunding Guide, being that investors can only inject capital based on their income. Still, while the ins and outs of these new regulations might appear complicated to established businesses who have never considered seeking funds before, they can offer an alternative to the stagnation some companies experience without an investor.

Posted by: Jeffrey Kadlic A co-founder and managing partner at Evolution, Jeffrey has spent the past 15 years as an investor and private equity professional with a true passion for working with dynamic small businesses. @kadlic

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