Earlier this year, Congress passed a law that allows small businesses to raise money–up to $1 million per year–through “equity crowdfunding.” Shares can be sold to investors online, without registration with the Securities and Exchange Commission. Dubbed the JOBS Act, this measure encouraged many business owners that they would be able to expand their financial capabilities.
Scott Schroeder is one such business owner. His electronics assembly company, Mega Tech, aims to raise about $500,000 by reaching out to potential investors online. “I’m looking for money to grow, but banks aren’t willing to take any risks,” says Schroeder.
What is holding businesses like Mega Tech back from successfully connecting with the investors they seek is the fact that both Congress and the SEC have yet to nail down the details of their crowdfunding rules and regulations. Scott Schroeder, and similarly motivated business owners, can’t get a straight answer about what is and isn’t allowed when it comes to online equity sales.
Gil Aouizerat, co-owner of California restaurant chain Pizza Lounge, would like to raise about $250,000 via equity sales on a crowdfunding site. He needs the extra capital in order to open several new locations over the course of the coming year. Aouizerat applied for a bank loan to finance the expansion, but was denied. He believes that crowdfunding is the next best option to “turbocharge” his business’ growth, but he cannot aggressively pursue it until the rules are solidified.
The SEC has established a January, 2013 deadline to finalize the rules for online equity sales, but it is expected that this deadline will not be met. The Financial Industry Regulatory Authority is also required by the JOBS Act to establish its own crowdfunding rules, but there is currently no deadline for when those rules will be determined.
Crowdfunding websites such as Kickstarter have become increasingly popular among entrepreneurs. But so far, most crowdfunding sites do not broker actual equity stakes in companies or projects. Under the JOBS Act, business owners can only use registered sites to sell shares to investors. That said, the investors can be virtually anybody–at least, until further regulation is agreed upon.
Loten, Angus. “Stalled Crowdfunding Rules Leave Business Plans on Ice.” The Wall Street Journal, 12/13/12.