Last Friday, the Washington Senate passed an amended version of crowdfunding bill HB 2023. The bill passed through the Senate by a 46-2 vote. With only a few hours to spare on Friday afternoon, the Senate put the bill to a vote and it was passed by an overwhelming majority. What does this mean for small businesses in Washington? It means we’re one step closer to allowing small businesses to raise capital through crowdfunding, i.e. advertising your securities offering to the public and allowing the public to invest in your company for equity (a piece of the pie).
History of crowdfunding
Well before the passage of the JOBS Act on April 5, 2012, a group of entrepreneurs and investors began pushing the idea of opening the investment landscape to include more than just accredited investors. Generally, private companies looking to raise capital from investors are limited to seeking investment from accredited investors due to the extensive disclosure and filing requirements that accompany raising investment from non-accredited investors. In steps the JOBS Act to open the door to the public advertising and investing in private companies. Unfortunately, the rulemaking process has been slower than expected and we are now nearly two years out from when the president signed the JOBS Act into law. Here’s a great summary of the entire history of crowdfunding.
Crowdfunding will impact small business fundraising
While we don’t know how large the impact will be, crowdfunding will change the landscape of small business fundraising. Companies will be able to advertise their securities offering to the public. The public will be able to invest in companies they believe in and want to own a piece of. Communities will be able to back local businesses to ensure those beloved small businesses have the necessary capital to prosper. The SBA has put together a simple training for entrepreneurs looking to learn more about the crowdfunding process.
Is crowdfunding different than Rule 506(c)?
Yes. While both crowdfunding and Rule 506(c) seek to open the door for general solicitation of securities offerings, crowdfunding is not yet legal. Rule 506(c), on the other hand, is legal and companies can use this exemption to publicly advertise offerings to accredited investors. Which brings up another important distinction between the two: Rule 506(c) only permits raising capital from accredited investors. Crowdfunding will allow selling shares to both accredited and non-accredited investors.
In general, there will be more rules and administrative requirements when using crowdfunding as compared to Rule 506(c). Check out this article to learn more about the differences between crowdfunding and Rule(c).
If you’d like to discuss crowdfunding or share your thoughts on opening the door for public investing in private companies, please contact me or comment below.
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