The crowd of people who can shell out cash to entrepreneurs is about to get a whole lot bigger — but not necessarily better, some say — because now it will include Joe Schmo.
Once the rules are written under a new federal law, businesses will be permitted to raise up to $1 million of capital in any 12-month period from a broader range of investors through what's termed "crowdfunding."
To some observers in Northeast Ohio, the crowdfunding measure of the Jumpstart Our Business Startups, or JOBS, Act signed into law last Thursday, April 5, democratizes investing by allowing people who are non-accredited investors to participate. Individual accredited investors who invest in private companies must have a certain net worth and income.
However, most acknowledge the risk of scams is high and the complications for businesses are plentiful when debt and equity investing is opened to more, often less sophisticated investors.
Crowdfunding goes live after the U.S. Securities and Exchange Commission finishes rulemaking, which is slated to take 270 days, or sooner if interim rules are published. Sean Peppard, who worked on the bill with U.S. Senate staff, predicts crowdfunding will be a tool some small businesses use to buy equipment or fund other expansions that they may not be able to finance with bank loans.
"It's not an end-all," Mr. Peppard added."I don't think it's going to replace angel investing or venture capital investing or private equity investing. Instead, what I think it's going to do is fill the gaps."
In 2010, 63 tech companies in Greater Cleveland received early-stage money from a variety of sources, according to Ray Leach, CEO of JumpStart Inc., a Cleveland nonprofit that assists startups.
That same year, 400 tech firms approached JumpStart alone for seed money.
"We still have this supply- demand challenge in regions like Northeast Ohio, where there are many more entrepreneurs seeking funding," said Mr. Leach, who was part of a group that helped shape the language of the crowdfunding provision.
Considering the capital-raising difficulty young entrepreneurs can face, particularly amid the credit crunch of recent years, Mike Belsito supports crowdfunding. He leads the business catalyst group Startup Lakewood.
"Anything that helps entrepreneurs get their ideas off the ground is a good thing," said Mr. Belsito, who co-founded eFuneral, a Cleveland-based online platform that helps people compare and choose funeral services.
But, he noted, "It doesn't mean it comes without challenges."
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