Anthony Price is the founder and CEO of LootScout, which counsels small businesses on how to raise capital and is the publisher of “Mini Books”.
Updated: May 24, 2021
Know How
SEC increases crowdfunding limits for entrepreneurs
By Anthony Price
By all measurements, 2020 was a bad year. The world was in the throes of a deadly pandemic. People lost both their jobs and loved ones, businesses closed, and economies tanked. It was raining lemons, and making lemonade didn’t seem possible.
But despite all the gloom, the U.S. Securities and Exchange Commission delivered good news in November, when it voted to approve increasing the amount entrepreneurs can raise using investment crowdfunding platforms. The new rules went into effect in mid-March.
The SEC raised the limits on the amount of capital raised on crowdfunding platforms, from $1.07 million to $5 million in a 12-month period. Historically, only accredited investors could raise capital in private companies, unless an applicable exemption was used. Accredited investors are deemed sophisticated investors by the SEC because they earn $200,000 a year, $300,000 for a couple, or have $1 million in assets, excluding their home. For far too long, the bar was too high for the average American to participate.
In 2012, President Barack Obama signed the Jumpstart Our Business Startups Act into law. This law made it legal for private businesses to raise capital from the public, through crowdfunding platforms, which solicit small-dollar amounts from the public. The SEC did not implement the crowdfunding aspect of the law until 2016 because it feared there would be massive fraud, which never materialized.
Capital formation has always been a challenge. Now, the playing field is almost level. While managing a successful crowdfunding campaign is not easy, it is a powerful tool. There are a number of Financial Industry Regulatory Authority regulated investment crowdfunding platforms, from Wefunder, to Republic, to Start Engine (Kevin O’Leary, aka Mr. Wonderful of “Shark Tank” fame is featured on Start Engine). The platforms approve crowdfunding campaigns, where all the activities must take place. Crowdfund Capital Advisors reported that $239 million was committed in 2020.
Investment crowdfunding is different from reward-based funding platforms such as Kickstarter and Indiegogo, where you may receive the product as a reward for contributing. GoFundMe is a donation-based platform used by individuals and small businesses to collect donations to overcome a hardship.
Investing in a local business may be an opportunity to help your community, and your pockets. In particular, it could help ease the growing wealth gap in the U.S., especially for people of color.
Be prepared to lose your money. If you can’t afford to lose a few hundred dollars or more, don’t do it. That’s not to say these companies will all be bad investments, but it is better to be safe than lose your shirt. On the flip side of the coin, many investors lose money in buying public stocks or going to a casino.
The future is bright for investment crowdfunding. Here’s to a better capital-raising landscape for entrepreneurs. Cheers! Let’s all make lemonade in 2021.
WBJ Web Partners
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