In 2016, crowd financing will become big business for small- and medium-sized companies. But tech-start-up unicorns? Not so much.
Thanks to new SEC rules finalized at the end of October, this year non-accredited investors will be able to invest up to $1 million in startups and middle market companies, opening up a way of raising capital that will appeal to businesses ranging from those without revenues to companies with annual sales of up to $5 million. The rules, part of Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012, go into effect in May.
Most people are familiar with crowd funding -- long a popular way of raising small amounts of money in return for rewards and perks. More serious crowd-backed corporate financing should be called crowd-finance -- offering equity ownership or debt in return for an investment. In other words, crowd finance, also sometimes called equity crowdfunding, is a security offering that offers an expectation of return. In 2016, crowd finance will no longer be only for smaller startups and ideas, but also for bigger, more traditional businesses.
A local dry cleaning chain could fund its expansion or finance switching to organic cleaning. A developer could fund a construction project.
It's a large potential pool of investors: Non-accredited investors comprise most of the population. Accredited investors have a net worth of at least $1 million, excluding your home, or an income of at least $200,000 or, if married, $300,000 for each of the last two years.
It's a market that should be in full swing by mid 2016 so the SEC's timing, intentional or not, is good.
One thing you probably won't see, however, are many technology "unicorns" being crowd financed under Title III. That's because if a company has more than $25 million in assets or takes on more than 500 individual investors, it must disclose financials -- something many companies with billion dollar valuation ambitions would find onerous.