Entrepreneurship crowdfunding dream is coming true

Entrepreneurship crowdfunding dream is coming true

The US House of Representatives has passed, by a walloping majority (407 t0 17), the Bill called HR 2930: Entrepreneur Access to Capital Act. It now needs to pass in the Senate, but is hardly likely to fail.

This new legislation is very important for the vast majority of entrepreneurs seeking to raise up to $5 million in equity funding, by means of crowdfunding. Crowdfunding is a way of raising relatively modest sums of money on the Internet from a large number of people, each offering small sums.

HR 2930 amends the Securities Act of 1933 to exempt from the prohibitions against use of interstate commerce and the mails for sale or delivery after sale of unregistered securities, including unregistered security-based swaps, any transactions involving the issuance of (crowdfunded) securities for which:

  1. the aggregate annual amount raised through such issue is $5 million or less; and
  2. individual investments in the securities are limited to an aggregate annual amount equal to the lesser of $10,000, and 10% of the investor’s annual income.

HR 2930 authorizes an issuer to rely upon certifications provided by investors. It amends the Securities Exchange Act of 1934 to exclude persons holding crowdfunded securities under this Act from application of “held of record” requirements with respect to mandatory registration of securities. It also amends the Securities Act of 1933 to exempt such crowdfunded securities from state regulation of securities offerings.

Role of equity finance

Many entrepreneurs seek to start a business, assuming that all they have to do is to write a business plan and angel investors and venture capitalists would come knocking at their door. They then express disappointment when that does not happen. A tiny percentage of startups attract any outside equity, other than from friends and family.

Raising loans is theoretically less of a problem, but banks these days will ask for more than simply a good credit rating and collateral. Equity has advantages, not least the fact that the funding is committed to your business and your intended projects. Investors only realise their investment if the business is doing well, eg through stock market flotation or a sale to new investors. Equity investors may bring more than just money, as well as potentially being open to more funding later.

Depending on the investor, you will lose a certain amount of your power to make management decisions an you will have to invest management time to provide regular information for the investor to monitor. Before HR 2930, assuming it becomes law, raising equity has been far too expensive and time consuming for most startups to consider. Post HR 2930, the burden will be much lighter, though you will still have to convince investors that it’s worth risking their money.

Importance of crowd funded equity

What’s really important is that a whole new avenue of funding will be possible. Much smaller amounts of equity will be able to be raised, beyond family and friends. One of the exciting aspects is that if you can convince someone to back you, then you are adding strength to your business–strength of support, reputation, and an avenue to other interesting possibilities.
You will still need to keep small investors informed, but chances are high that these people will be fans of the startup and introduce you to new opportunities that you had not imagined.
There are already many Crowdfunding platforms out there and the new legislation will bring forth many more. One of my MBA students is launching one next year. In his case it is focused on a narrow sectoral and geographical area, but if you were fortunate enough to be in his field, this would be an excellent way to seek equity for your business.