The U.S. Securities and Exchange Commission on Wednesday proposed new rules that could make it easier for Maine’s small businesses to raise money.
Last year, President Obama signed into law the Jumpstart Our Business Startups Act — otherwise known as the JOBS Act. A portion of that law laid out new rules that would allow small businesses to raise capital through “crowdfunding.” The new law also allows individuals to be more involved in supporting Maine’s small businesses by becoming investors.
Crowdfunding is a familiar term these days, popularized by websites such asKickstarter and Indiegogo, which allow individuals and nonprofits to raise money for projects by attracting a large number of people to give small amounts of cash, rather than the traditional model of relying on a few sources to give large amounts of cash.
Businesses have been barred, however, from using crowdfunding to attract investors. Until now. The new rules the SEC proposed yesterday would change that practice beginning sometime next year.
“This is a major step towards the most dramatic change for financing small businesses in many decades,” Don Gooding, executive director of the Maine Center for Entrepreneurial Development, wrote in an email. “When the final rules go into effect some time in 2014, every citizen will have an option to buy shares in small businesses that previously were unable to connect with potentially interested investors.”
The proposed rules don’t allow a free-for-all, though. There are exemptions and limitations for both companies and investors.
Under the proposed rules, a company would be able to raise a maximum of $1 million through crowdfunding in a 12-month period.
The cap of $1 million, which was recommended by Congress and maintained by the SEC, prove that the new mechanism is designed to help small businesses, Gooding said.
“Most of the companies looking for funding, especially those in Maine, are looking for modest amounts of capital. This will be very good news for small businesses, and Maine is a small business state,” he said.
Not all companies will be eligible to use crowdfunding. Those ineligible include foreign companies, publicly traded companies, certain investment companies, companies that fail to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to merge with or acquire an unidentified company or companies, according to the proposed rules.
As for investors, those with net worths and-or annual incomes of less than $100,000 will only be able to invest $2,000 or 5 percent of their annual income or net worth, whichever is greater, in a 12-month period. Investors with annual incomes of more than $100,000 will not be able to invest more than $100,000 through crowdfunding in that same period.
Susan MacKay, CEO of Cerahelix in Orono, is currently attracting investors the old-fashioned way, pitching her business to high-net-worth individuals or venture capitalists in the flesh. Being able to raise capital through online crowdfunding could help small businesses in several ways.
For one, MacKay said crowdfunding could help startups cover “the Valley of Death,” which is the gap that exists between when an entrepreneur has exhausted his or her own money, and that of friends and family, but before the company is mature enough that individual and institutional investors would consider investing.
Crowdfunding would also significantly deepen the pool of potential investors companies could reach, MacKay said. She has traveled to Boston to pitch Cerahelix, which uses DNA to produce high-purity ceramic filters, to investors face-to-face, but crowdfunding would allow her business to potentially attract capital from small investors all over the country.
However, there is a potential downside MacKay sees to crowdfunding. The crowdfunding model means that a small business owner, rather than managing a few investors who have injected large amounts of cash into a company, would suddenly need to manage a much larger number of investors who have each invested smaller amounts of cash.
“It’s almost like being a mini-publicly funded company,” she said. “I don’t know what that would look like.”
It all leads to her conclusion: “There’s no easy money.”
Gooding recognized the potential challenges, but still thinks it’s a net gain for the startup community.
“This won’t be the right choice for all small businesses, or for all investors, but it will nonetheless have a very large positive impact on the Maine economy,” he said.