|The SEC Just Made Crowdfunding Way More Interesting for Small Startups|
Monday 4:11PM, November 2, 2020
Tech funding usually happens in one of two ways. In one scenario, a software or service product— think Twitter — usually sells equity to venture capitalists who expect some kind of return on their investment. Hardware products usually go the crowdfunding route, building up a list of pre-orders that they can then use to pay for manufacturing.
Recently, however, a new Securities Exchange Commission ruling allows small companies to crowdfund equity raises, albeit in ways the aim to keep small investors safe from financial sharks. Using something called Regulation Crowdfunding, the companies were able to raise up to $1.07 million from non-accredited investors (aka you and me). Now, thanks to an update in the rules, they can raise up to $5 million in the same way hardware startups can raise millions on Kickstarter, but instead of delivering a product, these Reg Crowdfunding companies deliver profits or equity.
What this means in practice is that the alternative stock market just got a whole lot bigger. Because nearly any company can run a Regulation Crowdfunding round, you can buy a part of a small company in the same way you can invest in Apple or Amazon. Further, the SEC is “removing investment limits for accredited investors” and is now taking into account salary or net worth when it comes to limiting investments by non-accredited investors, meaning it can approve your investment to a certain income level.
Why should you care about this? Well, if you’re a small software maker, manufacturer, or, hell, restaurant owner you can use this technique to go to the general public to support your business. Because the investment cap is so much higher now, you can feasibly raise enough for business expansion, product development, or geographic growth. Regulation Crowdfunding is still looked at as something suspect by so-called professional investors, but it’s nice to know you can kick in a couple of bucks to help your buddy’s model rocketry business take off.
The real benefit, however, is the removal of VCs from the tech startup business. By allowing founders and companies with strong communities and popular products to raise from Average Janes and Joes, the ruling levels the playing field considerably. While equity crowdfunding isn’t quite taking off just yet, this move to expand it could bring new technology to the fore that isn’t dependent on the whims of some big money VC in Silicon Valley.
There are other parts of the ruling including so-called demo day communications that let startups talk about their fundraiser on stage or online, “permitting an issuer to use generic solicitation of interest materials to ‘test-the-waters’ for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities.” In other words, you can tell people about your investment opportunity to see how many will bite.
It’s all a bit wonky, but it just means that it got easier to invest in small companies you love and, provided they don’t implode, reap rewards from small businesses just as you would from the stock market.