Key Crowdfund Investing Business Parameters
Part of the Crowdfund Investing For Dummies Cheat Sheet
If you want to raise money via crowdfund investing, you must grasp the statutory requirements set forth in the JOBS Act. Here are the key provisions that affect how small businesses and entrepreneurs can use this funding opportunity:
Funding is limited to $1 million per year. This limit for crowdfund investing allows for sufficient seed money or early-stage investment for most businesses, while avoiding the unintended consequence of having larger organizations use this asset class as an ATM.
Funding occurs on an all-or-nothing basis. This provision means that the entrepreneur or business determines upfront the financial goal for a crowdfund investing campaign, works diligently to accomplish that goal, and either succeeds (and receives the full amount) or fails (and receives nothing, despite whatever investment pledges have been made).
Here are some key reasons that this provision exists:
To be fair to investors: Business owners must be clear with investors about how much money they require and how that money will be used. If a business aims to raise $100,000 and promotes to investors what it will do with that money, it can't possibly accomplish the same goals if it raises only a portion of that amount. An investor who pledges to support the $100,000 project shouldn't be assumed to support a reduced version of it.
To keep it lean: The all-or-nothing provision encourages entrepreneurs and business owners to think realistically and to set goals at the smallest level possible to be able to grow their businesses to the next level.
To discourage fraud: If this provision didn't exist, a fraudster could potentially go online, set up a bogus business pitch, and pocket whatever amount of money he could drive to his crowdfund investing page before being exposed. The crowd has power and intelligence, and it can sniff out fraudsters before they're able to secure significant amounts of investment pledges. If a fraudster is able to get $1,000 in pledges toward a $20,000 campaign before he gets busted, for example, he doesn't get the $1,000; he gets nothing. The all-or-nothing provision essentially grants the crowd time to sniff out the frauds.
Money can be solicited only from people who are connected to you via a social network. You can't post an ad to raise money for your startup idea on the radio, in a newspaper, in a magazine, or on television. Instead, you can solicit funds from people who know you by using an online funding portal to reach out to people with a general notice on your social networks. The people in your social networks may then extend your solicitation to people they know, which offers you more layers of possible investors.
The Securities and Exchange Commission (SEC) regulates how you can direct people to your funding pitch (on your online portal) using Facebook, LinkedIn, Twitter, e-mail, and other online networks. Visit the SEC to find the most up-to-date information on the regulations at play.
Only SEC-registered websites and broker-dealers can host crowdfund investing campaigns. The JOBS Act mandates that anyone seeking crowdfund investments must do so via an SEC-registered website or, in some cases, through a broker-dealer. The websites, known as funding portals, help the SEC make sure that a company seeking funds has disclosed as much information as possible so investors can make informed decisions. They also prevent a company from getting any of the funds unless it hits its stated campaign goal. If you're going to seek crowdfund investment support, you must use one of these SEC-registered websites (or a broker-dealer). Doing otherwise will land you in trouble.