Security and Exchange Commission OKs crowdfunding for small businesses

Owners of startups and early-stage businesses can now look beyond traditional financing and equity sources when searching for growth capital. Changes in federal and state laws make it possible for everyone — not only the top three percent of income earners known as accredited investors — to invest in small businesses.

Crowdfunding is the activity of raising money from everyone. Organizations have used it since the late 1990s to get a large number of small donations for art and philanthropic projects.

Rules adopted by the U.S. Securities and Exchange Commission in 2015 allow the general public to participate in securities-based crowdfunding. Instead of receiving a T-shirt or other gift of appreciation for a donation, crowdfunding investors get equity in the company they help fund.

Raising money is a regulated activity. To raise money in New Mexico, permission must be obtained from the Securities Division of the New Mexico Regulation and Licensing Department. An application must be submitted that provides information about who is raising money, how the money will be used, the character of the management team and the promises made to investors, including copies of the documents and materials used to attract them.

Companies are limited to raising $2.5 million through crowdfunding from New Mexico residents, and different rules and restrictions apply if an organization wants to raise money from people outside of the state.

Partnering with the masses

Crowdfunding is not cheap, quick or easy, but it has advantages over angel or venture capital funding. Company owners don’t need to sell the business to create the “cash exit” angels and institutional investors seek, and low- or no-profit margins may be acceptable to crowdfunding investors while the business is being built.

Crowdfunded money can be leveraged if it is part of a “capital stack,” a combination of money from grants, equipment leasing and debt financing. Like a cash deposit on a car or house that gives a borrower a lower interest rate and better loan terms, crowdfunded money is an asset that can help the company acquire at lower cost the largest portion of the money it needs.

Crowdfunding must be conducted on the internet, and many platforms claim to have a list of investors ready to make an investment. However, statistics indicate few people on investor lists actually invest and even fewer make a second investment. This means that companies seeking crowdfunding money must develop relationships with a large number of people. No crowd, no funding.

Investor due diligence

Any investment can be risky, and investors should scrutinize a business before committing money to it. A scoring system that reflects the investor’s values and preferences can help him determine the best place for his money.

Companies that are cashflow positive or whose owners are known by the investor might be a good fit. When the investor is familiar with the company’s products and services, she can research market trends and conduct her own investigation.

As rules of the capital industry democratize the making and receiving of investments and increase funding of local companies that represent the core of our neighborhoods — Main Street businesses

— it may be helpful to share resources to identify, qualify and engage people to become investors.

For more information, visit investor.gov or read the blog posts at linkedin.com/in/karldakin.

Finance New Mexico connects individuals and businesses with skills and funding resources for their business or idea. To learn more, go to FinanceNewMexico.org.