The new the Jumpstart Our Businesses and Startups Act has opened the door for crowdfunding, a boon to fledgling startups in Central Ohio seeking new ways to raise equity.
The law, which was signed by President Obama on April 5, provides a new source of funding other than loans, angel investors, or venture capital funds. Even though the law is only weeks old, there’s already a move underway to provide resources to startups and small companies on a local level.
Obama called the JOBS Act a “game changer.” The law authorizes the use of crowdfunding, in which a small business can sell up $1 million worth of unregistered stock every 12 months to an unlimited number of mom-and-pop investors. Unlike current crowdfunding sites that essentially enable individuals to donate on projects without any expectations of returns, the new law will enable individuals to get equity or provide micro-loans to a business.
The law opens the door for individuals to make small investments, but the JOBS Act limits investments based on the net worth of the individual. If an investor’s net worth is less than $100,000, the investment cannot be more than $2,000 or 5 percent of the person’s annual income or net worth. If the net worth is equal to or more than $100,000, the investment cannot be more than 10 percent of the investor’s annual income or net worth, with a maximum investment of $100,000.
A key change is that the investment offering can be made through a broker or an Internet funding portal that will match up investors or lenders with companies. The funding portal is a new animal under the JOBS Act. The SEC must decide over the next eight months how such portals will be regulated, and whether the standards will be more relaxed compared to other brokers.
Robert Kington, CEO of VacationView in Dublin, contends that a million dollars would give a startup enough time to build a product.
“One million dollars can fund a lot of work,” said Kingston. “It gives enough time to build a product, test our value proposition and pivot based upon user feedback.”
Crowdfunding may help level the playing field for smaller companies located in smaller and mid-size cities.
“The ability to garner funds in smaller increments can be effective for startups who have trouble gaining an audience in areas, like Central Ohio, where funding sources are more limited, as compared to tech areas such as Silicon Valley, New York, Boston or Austin,” he said.
Tom Guy, business development executive for Innovate New Albany, said the JOBS Act will benefit the entrepreneurs at the Inc@8000 center in New Albany.
“Non-profits have relied on crowdfunding for years,” Guy said. “Basically they’re taking an existing model and making it available to small companies that now can use crowdfunding to offer equity.”
In April, the National Crowdfunding Association launched CrowdFund Local, a nationwide initiative to bring crowdfunding to every town and enterprise community in America that wants to give its residents the opportunity to invest in their local businesses.
The NCFA is designing CrowdFund Local as a packaged service for municipalities of all sizes, whereby they can pool local leadership to establish a crowdfunding platform or on-ramp for local businesses, said David Marlett, executive director of the NCFA.
“We are anticipating the participation of the local elected officials, community banks, the chamber of commerce, economic development board, community-based business incubators, etc.,” he said in an interview.
The new act may also encourage micro-lending, said Candace Klein, CEO of Cincinnati’s SoMoLend.com, which offers peer-to-peer lending from institutions to small businesses.
“Small businesses can raise money in debt from lending institutions, friends, family and customers,” Klein said in an interview. Her company will position itself to enable individuals to participate in making microloans to companies when regulations under JOBS Act become official.
The Securities and Exchange Commission is required to establish rules that will govern the process of crowdfunding, especially with the creation of the funding portals. Therefore, seeking investments through crowdfunding likely will not be available until early 2013.