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Equity Crowdfunding: 3 Facts Entrepreneurs Should Know

Equity Crowdfunding: 3 Facts Entrepreneurs Should Know
The JOBS Act of 2012 gave startups unprecedented access to private capital, but there are still some confusing issues surrounding equity crowdfunding. / Credit: Crowdfunding image via Shutterstock

Equity crowdfunding has become a hot topic on the startup scene in recent years. The Jumpstart Our Business Startups (JOBS) Act, which was signed into law in 2012, brought significant changes to certain Securities and Exchange Commission regulations and made it easier than ever for an emerging business to raise private capital.

With these regulatory changes, the doors of opportunity have been opened for both entrepreneurs and investors, but it doesn't mean that everything about equity crowdfunding is clear-cut.

"Although the JOBS Act liberalized some regulations with respect to raising capital, we're still talking about securities laws here, and securities laws are complicated," said Chris Tyrrell, CEO and founding member of investment platform OfferBoard. "The results of noncompliance can be disastrous for a business, and take years and a lot of money to recover from." [7 Crowdfunding Sites for Businesses]

If you're considering equity crowdfunding to finance your startup, here's what you need to know:

There are three parts of the JOBS Act that most affect how companies can raise private funds: Titles II, III and IV. Tyrrell explained each of these regulations:

  • Title II: Also known as accredited crowdfunding, Title II allows any company raising money through private placements to advertise their raise publicly. Only "accredited" investors, with more than $200,000 in annual income or $1 million in assets, can invest. Because this regulation allows broad advertising of securities offerings, it opens up the capital-raising pipeline and brings deals out into the open that investors may otherwise never have seen. 
  • Title III: This allows any company to raise up to $1 million every 12 months from any accredited or nonaccredited investor through a broker-dealer or registered funding portal website. Depending on their annual income or total assets, investors can only invest up to 10 percent of their income or assets in such offerings each year. The SEC comment period for Title III draft rules ended recently, and a final rule is expected sometime in the first half of this year. 
  • Title IV: Title IV adds a new mini public offering, called the "small issues exempt offering." The original small issues exempt offering was capped at $5 million, and is still available, but the new offering is capped at $50 million in a 12-month period. This new regulation allows companies to raise money publicly from anyone, without caps on how much any investor may invest.

There are many different third-party crowdfunding portals that are designed to connect startups with investors. Because the JOBS Act, its regulations and these portals are relatively new, it's difficult to know which service providers can be trusted and will get you results. Judd Hollas, founder and CEO of crowdfunding platform EquityNet, noted that the size of the investor community is a fairly good indicator.

"Look for a crowdfunding portal that has the largest population of investors and an array of tools that can help you organize and execute your crowdfunding campaign," Hollas told Business News Daily. "Focus your attention on investors who express interest in your industry, since investors usually invest in companies that provide products or services they are familiar with."

"Find a service provider you trust," added Rich Rodman, co-founder and CEO of regulatory compliance tool provider Crowdentials. "Look across all verticals to find providers, and do your due diligence as to which one you want to go with. As a company raising capital, you want to focus on attracting investors and outsource the compliance aspect. For this reason, going with a third-party service provider is very wise."

Crowdfunding has certainly granted both entrepreneurs and investors unprecedented access to new opportunities, but it can do more than that if you're well prepared.

"The real Holy Grail of crowdfunding is not just an efficient way to raise capital for your business," said Zack Miller, head of the investor community at funding portal OurCrowd. "Done right, equity crowdfunding enlists an army of interested, smart and experienced investors who are incentivized to support the success of your company. They want to make introductions for partnerships and new hires. They want to help internationalize your business."

Having a solid business plan, a great marketing strategy and a winning product in place before you begin your campaign can ensure that you reap the full benefits of equity crowdfunding.

Originally published on Business News Daily.

Nicole Fallon

Nicole received her Bachelor's degree in Media, Culture and Communication from New York University. She began freelancing for Business News Daily in 2010 and joined the team as a staff writer three years later. Nicole served as the site's managing editor until January 2018, and briefly ran Business.com's copy and production team. Follow her on Twitter.