Crowdfunding Rules Hold Promise for Raising Billboard Equity

The SEC just published rules which will allow small businesses to raise money from non-accredited investors (e.g. non-millionaires) using crowdfunding.  A summary of the rules is available on the sec.gov website.  The rules will go into effect in early 2014 after the comment period expires.  The rules will open up a new source of capital to small businesses but there are regulatory drawbacks and the financing costs.

Here are the pros of the proposed rule.

• A small business can raise up to $1 million/year using crowdfunding.
• Investors make their own representation that they meet the act's requirements.  Your small business won't have to verify each investor's net income or net worth.

Here are the cons of the proposed rules.

• Investments are limited to 5-10% or each investors net worth or net income, with a maximum investment of $100,000 in any twelve month period.  I don't think this is a huge drawback because in my experience investors rarely want to put more than $100,000 into a small illiquid investment.
• You can only use one broker/dealer or funding portal at a time so you need to pick the right one.
• You must have reviewed financials if raising up to $500,000 and audited financials if raising more than $500,000.
• You must submit an annual report to the SEC.

Here are the estimated costs of a $1 million crowdfunding issue according to the rulemaking.

Brokers fee $70,000 or 7% of funds raised.
Edgar ID code  $60 at issuance.
Form C filing $6,000 at issuance.
Annual Audit.  My accountant says I should expect $12,000-15,000.  Ask yours.
Annual Report to SEC $4,000.