Until 2012, small businesses and startups have been largely restricted from approaching the general public as a method of gaining investors and the necessary capital for expansion and improvement. The JOBS Act enabled them break into these markets in order to gain funding and connect with more investors, including investors that weren’t already in their private networks. In 2015, the SEC added Title III to the current legislation: small businesses could now use crowdfunding platforms to gain necessary capital from the public and non-accredited investors.
Tapping New Capital Sources
By relaxing laws around investment sources, startups now had an alternative and anearly untapped source of potential capital. With the ability to pitch their company to investors, including non-accredited investors, they could raise money more easily. In particular, Title III crowdfunding allows small businesses the ability to raise capital in their early stages, perhaps before the establish their presence and make major connections. Since they could market themselves directly to the public, they could find investors who believed in them enough to directly make an investment at the early stages.
Capital Restrictions
The capital earned under Title III does not come without restrictions. Large investors can only invest a maximum of $100,000 of capital over a period of twelve months. Smaller investors can only invest a greater of $2,000 or 5% of the lesser of their annual income or net worth. In addition, the company (and key associated persons) using this type of capital raise must not be “bad actors” and are subject to certain disclosure and ongoing reporting requirements.
Capital Snowball Effect
Crowdfunding investments is a legitimate form of gaining capital for small business startups. By obtaining legal investment capital early on, they will have better opportunities to connect with larger investors, thereby expanding their business and their prospects. The capital they gain will attract larger investors. If the startup is a charity or public interest, some companies and groups will match their current capital with an equal investment. While Title III crowdfunding certainly isn’t as useful as Title II, Rule 506(c) crowdfunding, it serves as a possibility for certain companies seeking to raise capital.
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