The ‘new’ crowdfunding rules are out by the SEC…

After a few years following passage of the Jobs Act2012, the Securities and Exchange Commission has established the rules and regulations for crowdfunding for companies and investors.(Rules here)

In summary, the SEC’s rules affect how much funding companies can raise via crowdfunding and regulations for investors.  Entrepreneurs can raise up to $1 million online each year from individual investors with minimal financial disclosure.  Investors with annual incomes of less than $100,000 are limited to $2,000, while those who make over $100,000 are limited to $10,000.

There are some potential risks with crowdfunding as a company financing strategy.  Having a large “crowd” of unknown investors may bring management head-aches when it is time to have a shareholders’ vote on key issues.  Second,  the chances of a frivolous shareholders’ law suit will increase.  Third, if your company is highly successful and needs more capital, institutional venture capitalists are unlikely to fund a company with a “crowd” of shareholders for these reasons

Recommendation – if you have a relatively little amount of money to raise and can’t get funding from bank sources or other less costly capital providers, crowdfunding might be an alternative . (Less than $100K) However, if you need a greater amount of $ and will need larger amounts in the future, you might be creating more issues than benefits.

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