Well, it happened. This guy innovated a crazy awesome Aladdin magic carpet for Halloween.
And, the Securities and Exchange Commission (SEC) finally passed rules for online crowdfunding for investment (“equity crowdfunding”) on October 30, 2015.
Why does this matter for social entrepreneurs?
So, let’s say you are a social entrepreneur. You are creating tons of meaningful impact through your startup and have a business model that is starting to work. How are you going to scale? You may have pitched to dozens (if not more) investors. Maybe they like your idea and your impact, but if your experience is anything typical, you have amassed more rejections than a kid collects candy on a good Halloween night trick-or-treat run. What are your options?
Since its rise to popularity, crowdfunding has been a formidable option for social entrepreneurs raising early-stage funds. Why? It lets you build an audience, support, and outreach as you raise funds. Best of all, you get to appeal to people who can vote with their dollars. They can ‘invest’ in your idea because they believe in you and what you are doing; they are not restricted by the same demands for return on investment that VC’s or even impact investors may be bound by.
But up until know, this kind of crowdfunding was based on donation. It has been your good word or promise to deliver something amazing that your crowdfunders depend on. And, while they “invest” using popular crowdfunding sites such as Kickstarter or Indiegogo, there hasn’t really been a chance for them to receive a return on their investment beyond what you promised. They donate to support you and to receive first access to your game, book, product, or service.
It has been a bit more complicated (but not impossible) to set up equity crowdfunding. State tools such as Direct Public Offerings (DPO’s) have provided these pathways. But they have restrictions on where your investors can be located in order to invest in your campaign—i.e. they are bound by state law and scope.
And, though the JOBS Act with its equity crowdfunding provision, passed in 2012….the SEC hadn’t found the right way to formulate rules to both allow any US citizen to invest in startups, and to protect said citizens from fraud, deceptive, or unscrupulous practices by said startups.
Until last week. That’s when the SEC passed rules that attempt to satisfy both the buoyancy of democratizing early-stage investment and the concern of protecting the tomorrow’s new early-stage investor, i.e. you and me.
This matters for social entrepreneurs because this democratization of investment into startups has the potential to change the game for good ideas and meaningful impact. Social entrepreneurs who meet all of of the SEC requirements, can appeal to people and not just investment and impact investment firms to raise funds. They can validate and scale businesses at a pace set by the social enterprises, without necessarily trying to be tomorrow’s unicorn or polka-dotted zebra.
5 Quick Things Social Entrepreneurs Should Know About SEC’s New Equity Crowdfunding Rules
So, what are a few quick things every social entrepreneurs should know about these new rules? Here is the one-minute primer.
1. One million dollars in 12 months. Startups can raise up to $1M through online equity crowdfunding from unaccredited investors, in a 12-month period.
2. 5% or $2K for the under $100K club. Aspiring crowdfunding investors making less than $100K can commit 5% or a maximum of $2K toward equity crowdfunding, within one year. For the those making $100K or beyond, the limit is 10% or $100K, also within a year.
3. Newbie audit exemption. first-time equity crowdfunding issuers are exempted from the requirement for a financial audit (costly!) prior to raising equity crowdfunding fund
4. Raising $500K – $1M. Startups looking for less than $500K funding in online equity crowdfunding can provide tax returns that have been “reviewed” by an independent tax accountant. This is also true for first-time equity crowdfunding companies raising between $500K-1M.
5. Yup, there are more questions than answers. Have more questions? Join the club (and the crowd )! The best thing to do now is to stay informed as new crowdfunding platforms appear, and existing crowdfunding platforms pivot to make room for this new way to invest. For social entrepreneurs, though there are so many questions still in the air, the big thing doesn’t change: crowdfunding works best when it is backed by integrity. For every hardworking, mission driven social entrepreneur trying to stake a claim, there might be a few others who are “greenwashing” their way to online equity crowdfunding investment. Stay above the fray and and make good choices about whether your startup is in a good position to have ROI-seeking investors, how you measure impact, and whether taking on equity-funding might hamper, impede, or otherwise negatively impact your drive and focus to create positive impact. It’s an exciting time, for sure! But a few wayward examples, and this potential boon for social entrepreneurs could take turn for bust.
- SEC: SEC Adopts Rules to Permit Crowdfunding
- Entrepreneur: The SEC Just Approved Rules Opening Up Equity Crowdfunding to the General Public In a 3-1 Vote
- New York Times: S.E.C. Gives Small Investors Access to Equity Crowdfunding
- Gizmodo: The SEC Just Made a Big Change To What’s Legal In Crowdfunding
- Equities.com: Rapid Reactions to SEC’s Approval of Title III Crowdfunding Rules
- Entrepreneur: What the New Equity Crowdfunding Rules Mean for Entrepreneurs
- FinanceMagnates: SEC Passes Crowdfunding Rules: ‘Investing Will Be Forever Changed’
- Huffington Post Business: US SEC Votes YES to Equity Crowdfunding Today, More Than 1300 Days After 2012 Law and 80 Years After 1933 Law
- Wikipedia: Crowdfunding exemption movement
- Wikipedia: Equity Crowdfunding (US)
- Innov8social: What is Crowdfunding?
- Innov8social: What are 3 Crowdfunding Options for Social Entrepreneurs?