Want to raise a million dollars online? Then you want to hear about the JOBS Act and next year's big thing: crowd funding.

posted Jul 4, 2012, 8:24 PM by David Khorram   [ updated Jul 4, 2012, 8:24 PM ]
Posted from:  http://www.moneytalksnews.com/2012/07/04/crowd-funding-more-money-for-small-business/

Looking for ways to fund your startup? Join the crowd. Seriously.

Traditionally, small businesses have gone to banks for loans, but that’s tough to do these days. The stock market might be too big. And while there are special microloans for small business, what if that’s not enough money?

Try “crowd funding” – a new option for entrepreneurs coming as soon as next year. If the term sounds familiar, it probably is: Crowd-funding websites like KickstarterRocketHub and Indiegogo have been in the news recently for charity fundraisers and products people want to see.

And because of a new law called the Jumpstart Our Business Startups (JOBS) Act, funding portals like these will soon be able to offer small businesses something like a small-scale public offering: They’ll be able to raise cash directly from consumers in exchange for partial ownership.

In the video below, Money Talks News founder Stacy Johnson offers a quick overview on crowd funding and talks to a small business co-founder about how she might use it. Check it out, and then read on for more details…

As entrepreneur Miyah Haag suggested, small businesses could soon use crowd-funding sites to pay for everything from marketing to production. But how does it all work? And where did the law come from? Let’s tackle the latter first…

The JOBS Act

The idea for the bill initially grew out of recommendations from President Obama’s Startup America initiative last year – and was drafted by Republicans in the House of Representatives. It received rare bipartisan support and passed in April.

The law does a lot more than allow crowd funding. It also loosens many business regulations and makes other ways to raise capital easier. The U.S. Securities and Exchange Commission, the part of the federal government responsible for watching over Wall Street and enforcing securities laws, is still trying to figure out how this new fundraising model is going to work and how to protect investors. They’re currently establishing rules for business crowd-funding. (You can comment on the SEC’s website or read what others are saying.)

It’s not clear what the rules will be or when exactly they become effective, but since the law gives the SEC nine months to develop those rules, it will probably happen early next year. And we do know a few things already, based on the legislation itself

  • You can’t crowd-fund through your own website – only through approved portals.
  • Funding portals can’t directly handle the money and will need to register as a broker, find one, or use a bank.
  • They also won’t be able to make recommendations or promote particular projects, as some crowd-funding sites do now.
  • Investors who make less than $40,000 a year will be limited to investing $2,000 a year. Those who make $40,000 to $100,000 a year will be limited to investing 5 percent, and those who make more are capped at 10 percent with a maximum annual investment of $100,000.
  • Entrepreneurs who hold more than a 20 percent stake in the business they’re fundraising for will be subject to background checks by the funding portal.
  • Businesses with fundraising goals of more than $100,000 will have to submit tax returns and financial records. Those looking for more than $500,000 will also have to have those professionally audited.

How crowd funding works

You can already see crowd funding in action, just not for small businesses. Right now, websites like Kickstarter (which has seen more than $200 million in pledges and funded about 20,000 campaigns) let creative people looking for capital list projects (ranging from products to music and art) with a financial goal and a time limit. People who want to support those projects can back them by pledging a donation of their choosing.

If the project reaches its goal in the set timeframe, it gets funded with all of the money it raised, minus a cut for the platform, even if it’s way in excess of the stated goal. If it doesn’t meet the goal, the project gets nothing and the backers keep their money.