The Federal Reserve’s aggressive interest rate increases are making it increasingly difficult for businesses to obtain and service a commercial loan.
As a small business owner, I know firsthand the importance of access to capital. Credit access is the lifeblood of business, allowing entrepreneurs to turn their business dreams into reality. In fact, capital access is one of the best predictors of a company's future success.
A recent overlooked action by the Securities and Exchange Commission provides an alternative that can help fill the capital gap. Last year, the SEC relaxed rules related to regulation crowdfunding under Title III of the JOBS Act of 2012, which offers an innovative way for small businesses to access capital from large numbers of people over the internet.
Regulation crowdfunding is an alternative to traditional investment banking. It enables businesses to offer securities, stocks, or bonds to the public directly over the internet through sophisticated websites called portals. This process democratizes access to capital for independent businesses and opens early-stage investment opportunities for ordinary investors. It’s perhaps the most significant change in business financing regulations since 1934 when the SEC and the “private equity” structure were created.
Unfortunately, this innovative financing option has been hampered by regulatory challenges. Initial regulations were issued in 2016, and they imposed strict government limits on its potential. That is until now. The SEC's recent action boosted the maximum amount small businesses can raise from regulation crowdfunding in a 12-month period from $1.07 million to $5 million, vastly expanding the number and types of small businesses that can leverage it for their growth capital needs.
The new SEC rules also reduce paperwork and legal costs for small businesses, further broadening its appeal. (Regulation crowdfunding remains complex, and small businesses should work with a reputable internet portal and consult a qualified attorney.).
Since the update in 2021, regulation crowdfunding investments have more than doubled. This August, businesses raised $32 million, up from $27 million in July.
The SEC's action also eliminates regulation crowdfunding’s limits on accredited investors, something that never made sense in the first place, and it reduces the limitations on non-accredited investors.
Americans who earn less than $107,000 per year can now make annual crowdfunding investments of either $2,200 or 5% of their net worth, whichever is greater. This change will increase investment opportunities for ordinary Americans looking for venture capital potential returns, in which they were previously barred from participating. (Disclaimer: Regulation crowdfunding investments are risky and should be limited to investment funds you are willing to lose.)
The new and updated regulations of Title III of the JOBS Act of 2012 on regulation crowdfunding benefit and empower consumers as well as businesses and investors. They will enable and inspire smaller, nimbler, independent businesses to bring innovative new products and services to the market, helping boost economic growth and springboard the nation out of the current recession.
Regulation crowdfunding will revolutionize business financing for generations to come.
