Television commercials, Internet ads and e-blasts alerting investors that a company is raising cash could soon transform a startups' search for cash.
The Jumpstart Our Business Startups Act, passed April 2012, directed the Securities and Exchange Commission to dismantle an 80-year-old provision banning startups and other companies selling equity from advertising their efforts. After more than a year of discussions surrounding how to protect consumers from ill-advised investments under the new guidelines, the amendments were signed into the federal register this week. The amendments will go into effect in mid-September.
Although proposals to allow crowdfunding campaigns to offer equity in a company and to raise the number of "non-accredited" investors purchasing equity did not make the final cut, what has passed will have an immediate impact on startups seeking to raise capital.
Gary Glausser, chief investment officer for South Side-based technology investment organization Innovation Works, said the extended reach advertising provides will help private equity and venture capital firms raise money from investors outside of their regions.
"Historically, if some small company is raising funds they're going to people they know and believe are accredited investors and that kind of limits the population because they don't get to [accredited investors] they don't know. [Advertising] helps a wider audience become aware of these investment opportunities."
The wider pool of investors doesn't mean companies can take any bundle of cash that falls into their net, warned Mr. Glausser. Companies issuing equity must now take even greater pains to ensure the investors that respond to their sales pitches qualify as accredited investors under SEC guidelines.
An accredited investor is someone with an individual or joint net worth of $1 million, an individual income more than $200,000 the past two years or joint annual income more than $300,000 the past two years, with expectations to maintain that income level in the current year. And while current SEC guidelines allow companies to sell equity to up to 35 nonaccredited investors, rules surrounding how much information unaccredited investors must disclose and the issuing company's responsibility to ensure investors have enough knowledge to make informed decisions makes the option more work than most companies are willing to take on.
Hoping to take advantage of confusion that is sure to come with the new guidelines, in October Bob Carbone began work on Buffalo, N.Y.-based crowdsourcing software CrowdBouncer. The service automates the review and disclosure process required for companies engaged in crowdfunding campaigns by providing income verification and by measuring liquid assets to gauge an investor's net worth.
Companies can use CrowdBouncer's basic crowdfunding platform for free to access third party vendors that provide IRS data and links to accredited investors. A $2,500 a month fee provides more advanced services.
Mr. Carbone says a small industry of crowdfunding programs similar to CrowdBouncer is emerging in anticipation of equity-based crowdfunding eventually becoming law, but it isn't the beginning of the end for traditional crowdfunding campaigns.
"If an entrepreneur has an idea or project and doesn't have the ability yet to solicit investment in that idea, there's always a place for donation-based crowdfunding for those kinds of things," said Mr. Carbone. "Once those ideas mature into a product or something with some sort of tangible model, that's what's going to get people behind those ideas to look into equity crowdfunding."
Josh Lucas, founder of South Side based crowdfunding startup Crowdasaurus, agrees.
Long before the Jobs Act amendments were passed, Mr. Lucas was planning to team up with local television stations, newspapers, foundations and established technology businesses to advertise crowdfunding efforts.
His goal is to link a startup's crowdfunding campaign with regional organizations and businesses that already engage an audience that would embrace the idea. For example, a startup's crowdfunding campaign for an arts project could be advertised through local museums, or an educational idea could attract attention if linked to a teachers' associations website.
One of the main differences between his plan and what is expected to come in September is a equity exchanging hands, a proposal Mr. Lucas said plenty of startups can live with.
"Its about giving them the ability to post something meaningful and gather support around it. With that financial support from the contributor, you're also getting a network of people around you that you know believe in you because they just gave you $20," he said.
Editor's Note: This story was revised to note that CrowdBouncer Basic is free and includes access to third-party vendors.
Deborah M. Todd: firstname.lastname@example.org or 412-263-1652.