On May 16, equity crowdfunding became a reality in the U.S. as a result of Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act. The new rules allow a small private business to raise up to $1 million a year by selling shares to the general public without first registering the stock offering with the Securities and Exchange Commission. On the surface, this might seem like a boon to owners of small businesses, but closer analysis reveals that this well-meaning rule has a number of flaws. On the plus side, it does infuse up to $1 million into your business, but the price you pay for that money might make you think twice:
- New partners: If you are the sole owner of your small business, you might not like taking on a bunch of junior equity partners, each with a separate opinion, potentially offering advice on what they think you are doing wrong. Dealing with feedback and input from small or large investors can be a huge distraction, might influence decisions on how to run your business.
- Due diligence: The rules for equity crowdfunding subject you to a higher degree of time-consuming due diligence than what you’d experience through, say, a business loan. The reason is that your share sales must be mediated either by a broker dealer or an online funding portal, both of which are registered with the SEC and subject to its reporting standards. Basically, this means you have to allocate precious time and significant effort preparing disclosure documents about your small business, and then wait for the dealer or portal to its part.
- High costs: Did you know that you could spend anywhere from $30,000 to more than $100,000 simply to prepare the documents required for equity crowdfunding? Yikes! You’ll need to fork over paperwork for an SEC filing statement, legal disclosures, financial information and more. You must spend this money before you even know whether you’ll be successful in your capital raising efforts. And that’s not all – you’ll also have to pay the broker dealer or fundraising portal a share, usually 7 percent, of the money you raise. That’s $70,000 on a $1 million sale of shares, plus all the documentation costs.
- Ongoing reporting: Your paperwork nightmare doesn’t end when you sell your crowdfunded shares. The SEC requires that you produce reports periodically, because the agency is charged under Title III with monitoring the private market. This may likely require you to hire a lawyer and/or accountant to prepare this reporting properly.
- Limiting your options: Accepting funds from equity crowdfunding now can make it much harder to get any attention from venture capitalists or angel investors later on. Typically, these investors dislike petty shareholders even more than owners do.
Now, we are not saying that raising capital isn’t a good way to pump money into your business. But we think that it’s a lot easier and cheaper to start with a business loan. In today’s lending market, a small business owner can receive a loan with no upfront fees, no ongoing reporting, and no time wasted on petty shareholders.
If you’re looking for up to $150,000, IOU Financial can get you funds with instant pre-approval and funding in as little as 24 hours. When you compare the cost of a loan with what is required by equity crowdfunding, it’s clear that you can save a bundle by finding the right lender and avoiding the hassles of dealing with shareholders.