If you have a startup and looking forward to raising money through crowdfunding, the US Securities and Exchange Commission now makes it possible for public investors to put money into your business – even online.
The SEC on Friday activated a 2012 law to make this possible, and a 3-1 vote at a public meeting sealed the deal.
There is no doubting the fact that several small businesses including charities have used internet crowdfunding platforms such as Kickstarter, GoFundMe, and others to raise the capital needed for their projects; but as from mid-2016, private entrepreneurs, charities, artistes, and other profit-making ventures will be able to raise capital by offering their stocks online for people to invest in.
There is danger around the corner, though. About two-third of most startups fail and die off within the first five years, and online investors may end up losing their money if the business does not succeed at all costs. Another thing: fraudsters can offer non-existent business shares to the public and fleece them of their money.
A law professor at the University of Mississippi and a mutual-fund investor advocate, Mercer Bullard, said during a phone interview that SEC can’t necessarily prevent online scams to which investors looking to invest in startups are subjected because anyone can put up a sham securities offering with the aim of defrauding members of the public.
But to protect public investors from online scammers, the SEC mandates that crowdfunding securities offerings must only be offered through registered and accredited brokerage firms. The startups must also explain to potential investors the process for investment, limits for investments, resale restrictions, how the fund is to the used, names of directors and contact addresses among other things.
Mary Jo White, SEC Chairperson, explained that the commission will soon begin to monitor how the market develops in order to take care of loopholes and perfect all things for both startups and investors. To this extent, several businesses which had been struggling with finances now think it is time for them to consider exploring the potentials within the new SEC crowdfunding opportunities.
The overall objective of the SEC rule according to the 2012 law is to enable potential entrepreneurs, and new startups raise the much-need capitals they require online without bothering much about paperwork.