On Monday, Sept. 23, the Securities and Exchange Commission (SEC) enacted changes to Rule 506 allowing for general solicitation (advertisements essentially) on private investments, reversing an old ban. Only accredited investors—earners taking home $200,000 annually for at least two years or a net worth of more than $1 million— and institutional buyers need apply.
Although regulations affecting equity crowdfunding—soliciting funds from the general public in return for equity in your startup—didn't materialize this go-round, the SEC is expected to tackle the issue in due course, says Ruth Hedges, CEO of Unismart Capital Software, a Las Vegas, Nev.-based provider of business plan and due diligence reporting software.
It may take some time before a Kickstarter for startup funding shows up and begins accepting investments; currently organizations can only use crowdfunding sites for "reward or donation," not for stock ownership, says Hedges. But when the SEC does finally lay down the law on equity crowdfunding—Time.com reports that a new provision of the Job Act goes into effect in 2014 and will make equity crowdfunding available to everyone—startups will face a drastically different funding landscape.
"The average investor has never had access to the deal flow," says Hedges. Equity crowdfunding, so the thinking goes, would allow small investors to participate in a process generally reserved for venture capitalists and other private investors with big pockets.
When that day arrives, it will be "an exciting, powerful game changer," she said.
What to Do When Crowdfunding Rules Clear the SEC
Start Planning Now
Once equity crowdfunding becomes legalized, you'll want to be early to the party. "The entrepreneur has to start planning now," says Hedges.
"Plan for your campaign," she says. Line up your disclosures, brush up that business plan, prepare a press release, and essentially gear up for a major charm offensive. Instead of pitching VCs, you'll need to attract regular folks. Focus on growing and engaging with your Facebook and Twitter followings.
"You only have 30 days," to run a crowdfunding campaign, says Hedges. Make every second count by getting as much preparation done as possible before your campaign launches. If you think that you'll one day want the financial backing of the crowd, start planning—or at least researching—now.
Don't Jump the Gun
"Do not try to crowdfund before it becomes legal," says Hedges. Penalties can sink not only your chances of getting funded, but also put your business at risk. The Internet has led to many innovations, but when it comes to raising capital, it's best to wait for the SEC to give the go-ahead.
You'll also need the proper paperwork. There are very specific forms you'll need to fill out, which nobody can file, let alone process, at this stage.
Fast-track Your Ambitions
If you're an established small business, it's time to think like a startup again. Equity crowdfunding is expected to level the playing field for entrepreneurs. If you need capital for the next stage of your growth, it may come from a collective of individuals, each with a few bucks to spare, instead of a bank loan.
"Use it for a merger or an acquisition" or any other initiative that will help nudge (or hopefully skyrocket) your business to the next level.
Pedro Hernandez is a contributing editor at Small Business Computing. Follow him on Twitter @ecoINSITE.
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