Crowd-funding Gets More Controlled

By , March 31, 2012 9:00 am

You are an entrepreneur contemplating starting a business and you are wondering where you will get the funds to finance it with. On March 22, 2012 the U.S. Senate passed the JOBS Act, or Jump-Start our Business Start-ups. This, they presume, will make it easier for small businesses to raise money.

You have heard the word, Crowd-funding, previously written about in this column. Business owners can raise money from people they may not even know by posting their information and financial need on websites that facilitate this purpose. This is money that basically you wouldn’t need to pay back, and it would help you start your business, and would be considered a donation. This can be an issue of legality with the Securities and Exchange Commission because investors are not being given a security in exchange for their money. However, some businesses are giving back to the investors some form of payment in the way of product they created.

Sites such as ArtistShare, Kickstarter, Pledgemusic and Funding4Learning have a failsafe. They hold funds in an escrow account. If the nominated target isn’t reached, all funds are returned to contributors. While sites such as Fondomat, RocketHub, IndieGoGo and Sponsume allow projects to keep all the funds raised.

But now the U.S. Senate has tightened the process with its amendment saying that any company raising money using Crowd-funding must still file some basic information with the Securities and Exchange Commission, including the names of directors, officers and holders of more than 20 percent of the company’s shares, plus a description of the business and its financial condition.

For companies seeking to raise less than $100,000 they must also provide tax returns and a financial statement certified by a company principal; those raising up to $500,000 must provide financial statements that are reviewed by an independent public accountant.

Indicating that there is a great chance for fraud with crowd-funding, intermediaries offering to help companies raise money must register with the Securities and Exchange Commission, make sure investors are advised of the risks they are taking, and take measures to present fraud.

This bill will return to the House for a final vote, and then on to President Obama the week of March 26 for his ratification.

Margo Moore teaches BE 261 Starting a Small Business, CEO 001 Setting a Course for Your Business, CEO 002 Knowing Your Market, and CEO 003 Formulating Your Financial Strategy.

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