A federal law promising an easier process for raising capital has energized entrepreneurs and investors, but many experts are pointing to the caveats.
The provision was part of last year’s bipartisan Jumpstart Our Business Startups (JOBS) Act, which was designed to help businesses grow and hire.
One facet of the JOBS Act, in particular, was created to make it easier for startups and small businesses to gather small amounts of money from nonaccredited investors through online funding portals, a process known as crowdfunding. In return, business owners give the investors small equity stakes in the company.
Previously, businesses could only take on “accredited investors,” who, under the law, had a certain net worth, income or personal relationship to the entrepreneur.
And if they went the crowdfunding route, using services such as KickStarter and Indiegogo, a business owner couldn’t give investors equity in the company, only a product _ such as a copy of a movie, if that was the project.
Some critics worry the new rules could cause small, inexperienced investors to lose money or be exposed to fraud. That’s why the Securities and Exchange Commission recently released nearly 600 pages of rules dictating the new provisions, open for public comment for about another two months.
Can the crowdfunding legislation work for your small business or startup venture? The Charlotte Observer spoke with attorney Benjamin Baldwin, who specializes in equity investments and capital structures, with the Charlotte, N.C., firm Robinson, Bradshaw & Hinson.
Baldwin, who has written in North Carolina business and law publications about the impact of the Jobs Act on the state, said that while the new federal legislation doesn’t directly address jobs or employment, growth in the state’s small-business ecosystem could lead to more jobs. And if small businesses are able to raise capital more easily, that growth might happen faster.