We have been reading in this blog recently about the JOBS Act, and how it will make fund raising easier for companies wishing to go public. But what about us smaller guys who have a business and would prefer not to go public and would only require $100,000 or less for a project or to get our small business off the ground? Basically, many small businesses have been raising money from friends and family by using the Internet.
The passage of this law in April has mandated additional controls on our ability to raise capital through social networking. The Senate is concerned with the possibility of fraud and the rise of unscrupulous individuals wishing to make a buck on unaccredited investors and companies who are naïve about this investing stuff and utilizing the unorthodox medium, the Internet. The Senate, which insisted on these additional controls, is looking for intermediaries to be registered with the Securities and Exchange Commission, that agency which watches for dirty dealing by intermediaries on unsuspecting investors. So controls have been sanctioned by the Senate to mitigate the possibility of fraud. One of those restraints is discussed below.
Those companies wishing to raise up to $100,000, must provide tax returns and financial statement s certified by a company’s directors. For those wishing to raise from $100,000 up to $500,000, they must provide financial statements that are reviewed by a CPA. Consider the cost of providing the financial statement review. It could cost the company from $20,000 to $30,000, a significant amount for a small business. So if a company wanted to raise $100,000, the actual net funding in this instance would be $70,000.
Why go for $100,000 or more? Why not raise $90,000 or less? A company would not be required to provide a financial review, just the financial statements signed by a principal of the business and your tax returns. The company would net $90,000 and not incur the costs of a CPA review.
So consider the cost when deciding to raise money. I am sure we will be hearing more about this process in the forthcoming months and any additional restraints on issuers and crowdfunding portals, like Kickstarter, IndieGoGo, RocketHub, Fondomat, etc.
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.