Business Planning: How to Use Crowdfunding for Equity Investments

By Steven D. Peterson, Peter E. Jaret, Barbara Findlay Schenck

In 2016, under rules approved by the US Securities and Exchange Commission (SEC), private start-ups and small businesses can offer a share of their financial returns or profits to US citizens (called non-accredited investors in government jargon) who invest through crowdfunding campaigns.

In other words, instead of receiving rewards of logo-emblazoned items or early-release products, equity crowdfunding participants will receive shares of private businesses.

The rules for so-called equity crowdfunding fall under the US Jumpstart Our Business Startups (JOBS) Act. The act allows entrepreneurs to raise up to $1 million over a 12-month period from individuals, who can invest up to $2,000 or 5 percent of annual income or net worth, whichever is greater, or up to 10 percent, if annual income and net worth are equal to more than $100,000. No investor can invest more than $100,000 in one year.

As with traditional crowdfunding campaigns, businesses need to reach their full funding goal before accepting any of the investment commitments. Plus, businesses need to meet disclosure and financial reporting requirements that vary depending on equity-raising goals.

Equity crowdfunding is still in its shake-out stage. Which sites will become the Kickstarters and Indiegogos of equity crowdfunding is still to be determined. Search for “equity crowdfunding portals” to find out about emerging players. Turn to sites like Crowdfunder.com for checklists to use when planning an equity crowdfunding campaign. Above all, get advice from your business attorney before venturing into this new funding opportunity.