Raising money to launch a business has become a little easier now that the Securities Exchange Commission has implemented Title II provisions of last year’s JOBS Act, lifting the 80-year long ban on general solicitations. It’s now legal for entrepreneurs to advertise, market, and publicly promote their capital raising activities online (and even offline with TV ads) to investors. This may make the fundraising process the new Match.com for businesses and investors.
“Crowdfunding platforms function much like Match.com in terms of bringing together individual entrepreneurs and individual investors for a human-to-human interaction,” says Judd Hollas, CEO of EquityNet, a crowdfunding platform that has raised more than $200 million dollars from accredited investors for entrepreneurs since its launch in 2006. “In some way it allows businesses to “court” investors and to engage them in investing in their projects.”
“When you go to www.match.com you are able to search for and review males/females prior to even registering,” he adds. “That no-commitment prospecting ability has a profound impact on convincing interested visitors to then sign up.” Title II will enable crowdfunding platforms to operate in much the same way by letting businesses advertise the money they are seeking.
The new rules about general solicitation allow for entrepreneurs to reach outside of their network in raising money through private placement offerings. But investment is still limited to accredited investors (those with a liquid net worth of $1 million).
This is really phase one of equity-based crowdfunding, which has been split into two parts, says Rodney Sampson, a Diversity & Inclusion Advisor to ABC’s entrepreneurial show Shark Tank and author of Kingonomics, a twenty-first century interpretation of Dr. Martin Luther King Jr’s economic vision.
“The first part was the removal on the ban on general solicitations. The second is the removal of the requirement on accredited investors.” Allowing crowdfunding from non-accredited investors is still on the fence, he adds. The primary concern among SEC officials and other interested parties is the potential for fraud.
However, it is interesting to note that while the SEC did lift the general solicitations ban, it placed the bar for accredited investor verification higher—eliminating the option of “self-verification.” Meaning, fundraising entrepreneurs must take reasonable measures to verify the accredited status of investors.
The SEC has designated certain “safe harbor” methods that if followed count a reasonable verification, says Hollas. He explains that individual safe harbors for verification of accredited status are satisfied if the issuer (business owner) does any one of the following:
1. Obtain any IRS form that reports income including but not limited to Form W-2 (“Wage and Tax Statement”), Form 1099 (report of various types of income), Schedule K-1 of Form 1065 (“Partner’s Share of Income, Deductions, Credits, etc.”), or a copy of a filed Form 1040 (“U.S. Individual Income Tax Return”) for the two most recent years, along with obtaining in writing the person expects to reach the income level necessary to qualify as an accredited investor.
2. Review assets and liabilities within the prior three months to determine net worth. For assets this is bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties. For liabilities, this is a credit report from at least one of the nationwide consumer reporting agencies.
3. Obtain written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that the business owner has taken reasonable steps to verify that a person is an accredited investor.
There are an estimated 5 million accredited investors in the US, yet only 10% are actually involved in the investment process. Since businesses will now be able to advertise their capital raising to these investors, Hollas and other industry experts believe this could lead to a boon in driving more accredited investors to participate in the investment process through crowdfunding,
Even though crowdfunding grew by 81% worldwide in 2012. Sampson is quick to point out that many minority and women business owners are still unaware of what it is or its benefits. And more importantly, they fail to understand what they need to do to prepare their businesses to take advantage of equity-based crowdfunding.