Startups, Crowdfunding and Why Access to Capital is Essential

It’s simply a fact of business life, whether for a startup or stable venture, and it hasn’t really changed. It takes money to grow. What has changed, and some would say dramatically, is the range of options for where that money originates.

The Old Way
It used to be that a company had four main options for raising the money needed to grow.
1. Give up equity in exchange for capital, either through venture capital (VC) or angel investor financing
2. Tap into the goodwill of friends or family
3. “Bootstrap” it and use personal reserves of cash or credit, or
4. Register as a public company and conduct an IPO.

The Problem
The big problem with those four options is that it left a huge gap in the marketplace. Lots of small startups or companies with great ideas and lots of potential simply couldn’t make any one of those four options work – at least not long enough to reach a critical mass of profitability. Ramping up a business can be very costly, depending on the industry and the type of business: product development and acquisition, intellectual property development, plant and human resources costs, systems and testing … the list goes on. The economic importance of the private sector, a significant job creator, is why the status quo wasn’t acceptable.

Crowdfunding has become a 5th, and very popular, option for companies big and small. Going direct to the public via generally solicited campaigns including through the use of online and social media outlets, and raising money from the many rather than the few is the new way of capital raising. It’s concept that was enabled by technology, ease of access to information in this new age, and fueled by the crowd. It’s now recognized by the United States government and included in the regulatory framework of the Securities and Exchange Commission as a tool to raise capital.

The Jumpstart Our Business Startups Act, signed into law in April 2012, has resulted in more options and fewer hurdles for access to capital for small business of all shapes and sizes. Most significant from the crowdfunding perspective is the elimination of the prohibition against general solicitation–advertising to the public. This law was became known as Rule 506(c). The JOBS Act also introduced Title III (Regulation CF) and Title IV (Regulation A), which are tools for crowdfunding as well, but neither will be as important and practical as Rule 506(c).

While the crowdfunding industry continues to mature, and more entrepreneurs and investors take advantage of the new regulatory structures in private market activity, the cost of raising capital is dropping, reducing barriers to growth. Access to capital is essential, and the United States has paid attention by giving its companies a way to access capital from the masses.

Verification of accredited investor status is a requirement under Rule 506(c). Contact today to discuss your verification needs.

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