Before implementing the Regulation Crowdfunding exemptions, business fundraising was possible to obtain only from the group of the accredited investors (those who make at least $200k per year , $300k together with a spouse or has $1 million of net worth). Now, all American adults can help businesses raise the needed capital. However, it is already established that the equity crowdfunding needs some changes, in the present order it does not work efficiently. Why is it so?
According to Vincent Bradley (CEO and Co-Founder of FlashFunders), there are a few main reasons:
- Businesses which try to raise more than $500k are required to present their GAAP Standard financials. In fact, although it seems to be a sensible solution to the problem of the lack of business transparency for potential investors, the young businesses usually are not ready to present GAAP financials yet. Simply because it is an additional cost and usually it is not prepared in the early stage of a company’s growth.
- Yet another obstacle to overcome is a Form C requirement – it is a 25 page document which can take more or less 50 hours to be filled up, probably with the help of a lawyer, thus, quite costly. The rule says that businesses are obliged to file the Form C with SEC before they start gathering investors.
- When it comes to the funds which businesses may receive, they are not limitless. It is not a problem for companies in need of some smaller amounts, but in the case of the bigger enterprises it becomes a hurdle. Reg CF allows businesses to raise no more than $1 million in 12 months.
- The next weak point of the equity crowdfunding is 12(g) rule. If a business achieves fundsraising success thanks to the Reg CF and exceeds the amount of $25 million in assets, it will be required to be reported as public. This brings a risk that whether a business is ready/willing or not, it will be made enter the public sphere.
- The process of managing the big group of shareholders after the successful fundraising is not easy. Organising the good communication with all the investors may demand some outside help. Startups use the help of special companies (for example Special Purpose Vehicles – SPVs) to gather the group, organize and facilitate the cooperation. This way of solving the problem could be a good idea for equity crowdfunding as well, which is supposed to gather thousands of investors in one fundraising. Unfortunately, SEC does not allow SPVs to take part in the Reg CF fundraising process.
The Fix Crowdfunding Act (FCA) gives hope for improvements in the area. It is waiting to pass through the Senate, but it already enables us to hope for the better crowdfunding conditions. This bill is going to repair the problematic faults of Reg CF and to modify the rules so that they would become more convenient for young fundraising companies.
What exactly can we hope for now?
Thanks to the FCA, the special purpose vehicles may be allowed in the equity crowdfunding and the 12(g) rule will not force companies to go public.
What else should be done?
The initial costs of lawyers or CPAs can unable many small businesses to join the equity crowdfunding. The companies should have a chance to appeal to investors and check the “ground” before they risk quite a big amount of money. Furthermore, the limit for the raised capital should be increased to $5 million. This would attract more companies, as many need much more capital than $1 million.
The potential of the equity crowdfunding is very promising, yet still there are spaces which need improvements to make the idea function better. It is all doable, but needs some time, experience and expertise.