Nearly four years has passed since Congress passed The Jumpstart Our Business Startups (JOBS) Act, which was intended to expand and to ease methods of capital raising by relaxing the regulatory burden on smaller companies. One of six provisions of the JOBS Act was Title III: “Regulation Crowdfunding” (Regulation CF).
Beginning May 16, rules related to Regulation CF will allow small businesses to begin accessing this new funding resource. Investors of all income and net worth brackets will be able to participate in companies in their communities, whose founders they know or whose product or mission they want to support. Finally, the 99 percent will have the opportunity to get in on the ground floor of those early-stage investments that have historically only been available to the one percent.
Until now, only accredited investors could participate in early-stage and start-up investing. The “accredited investor” hurdle is a high one, limited to individuals who earned $200,000 annually, married couples with combined annual income of $300,000 or whose net worth — excluding the equity in their residence — was greater than $1 million.
Federal crowdfunding regulations allow businesses to raise up to $1 million in new capital every 12 months from an unlimited number of investors nationwide. These companies will be required to produce ongoing reporting to their investors and, in some cases, to provide audited financial statements. For investors, the amount that can be invested every 12 months is determined by annual income or net worth.
While the Securities and Exchange Commission was contemplating how to implement this Congressional mandate, more than half of the states in the nation have enacted their own rules: Some mirrored the capital cap of $1 million; others allow companies to raise up to $4 million every 12 months. Unfortunately, California has not only been slow to come to the table on these regulation but several bills introduced in 2014 and 2015 failed or died for lack of support. However, on February 18, a new crowdfunding bill (AB 2178), was introduced in the California Assembly. As the saying goes the “devil is in the details.” Let’s wait and see.
Crowdfunding is a 21st century version of “opening the Rolodex.” It is an opportunity for inventors, startups and existing small businesses to convert their social capital into funding by seeking investors among their professional and personal relationships, from customers to suppliers to their faith communities and even fellow hobbyists. While investing is never risk free, the potential benefits to businesses, investors and local economies are undeniable.
Crowdfunding will open new opportunities to the average investor. It has already helped shape the landscape for a new funding model called the Community Capital Marketplace (CCM). It is a collaborative process in which individual investors contribute equity capital to strengthen small business balance sheets and position those companies for funding by local community financial institutions — a multiplier effect, leveraging the power of the crowd.
CCM provides a clear path for businesses, investors and financial institutions to leverage the provisions of the JOBS Act to their mutual benefit and to the benefit of the community at large. It can help create stronger local economies, better funding vehicles and an increased number of people who can participate in and benefit from investment opportunities: The perfect storm for positive change.
Having spent nearly two decades as the CEO/chairman of a North Bay community bank (Circle Bank), I have seen the availability of capital change dramatically for small businesses. I have commiserated with local investors who were forced to sit on the sidelines because they were not “qualified” investors. I know what can be accomplished when resources are combined. I know the drive, intellectual capability and just plain hard work that entrepreneurs and small businesses owners bring to the table. CCM offers banks and credit unions, investors and entrepreneurs the opportunity to collaborate, creating a powerful funding mechanism. Because crowdfunding can shore up the balance sheets, traditional financial institutions benefit from the creation of viable commercial customers; businesses are financed, and investors can participate in a way previously denied to them.