If the last year or so has proved anything, it’s that crowdfunding can be incredibly helpful for those who have been struggling to get their small business off the ground or keeping it afloat. After all, unless you have the resources to do so, getting a small business on the stock market often takes time that most small business owners don’t have. This is why crowdfunding has become so important. It gives the public a chance to invest in small companies that they may not have had access to previously.
But, like anything to do with business and money, there are federal regulations that apply to crowdfunding. These regulations are in place to make sure that things stay fair and help people avoid fraud. However, these regulations may not seem quite as fair when something rocks the economy in a dramatic way (like a global pandemic, for example). This is when changes to regulations become a necessity. So, back in 2020 the Securities and Exchange Commission (SEC) announced that they would be changing some of the regulations surrounding crowdfunding.
But before we can talk about how these regulations could help, we need to go over what changes have been made to these regulations.
What are these changes?
The first thing to know about these changes is the different crowdfunding categories. There are three main categories for a company or business to fall under, and most have their own subcategories. They are Reg. D (Rules 504, 506(b), and 506(c)), Reg. CF, and Reg. A (Tier I and II). We’re mainly going to focus on the main categories in this article, but you can read about the subcategories here.
There were a few different changes, but the most exciting change is that the max offering amounts (meaning how much they can raise) have been raised significantly. Reg. D was raised from $5 million to $10 million for Rule 504 (506(b) and (c) don’t actually have offer limits); Reg. CF was raised from $1.07 million to $5 million, and Reg. A $50 million to $75 million. So, clearly there is a lot more room for small businesses to raise the funds that they need to keep going in this market.
One thing to know is that this major change is not necessarily permanent. The changes have mainly been a provision added to help keep the economy moving during the current turbulent market. So, they may go away once things become more stable again. That being said, there have been many who have been pushing for these changes to become permanent.
How can they help small businesses?
These changes to crowdfunding regulations have only been put into place recently, so we won’t know for sure how much the changes will help until some time has passed. But there are many who believe that these shifts in regulations could help provide some much-needed relief.
If we learned anything from the 2008 Recession, it’s that small businesses tend to be impacted harder from negative swings in the economy. There are a lot of reasons for this, but one of the biggest is their access to funding. In 2008, banks were more likely to lend money than to small businesses. Bigger businesses are less of a gamble than smaller businesses, seeing as they have access to more resources and are more likely to have a stronger base. So, banks weren’t as willing to take the risk of investing in newer businesses. This means that small businesses really struggled in getting the money that they needed to either get going or to keep going. During this time, crowdfunding wasn’t really something that businesses could take advantage of. This led to many businesses failing.
But now that we are in the 2020’s things are a bit different. In 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. This law made crowdfunding easier and more accessible to people. That way small businesses wouldn’t have to rely on banks to get the funding that they need. With the introduction of crowdfunding websites, this has become an even simpler way for funding to become available.
So, as you can probably guess, upping the limits of how much money small businesses can raise could help keep afloat or get their start. Plus, they can do it without having to turn to banks and asking them to take a chance on them.
But these changes don’t only benefit small businesses. It could also benefit people who are interested in investing in crowdfunding. The people who usually invest in crowdfunding tend to be wealthy individuals. That means that they are more likely to help businesses hit that cap much more quickly, leaving very little room for others to invest in these businesses. Raising the cap on how much funding businesses can raise means that it is more opportunity for others to get involved in keeping their local economy going.
Obviously, COVID-19 has hit us all hard. But small businesses are among those who are receiving the brunt of the pain. With people staying home and shopping online, it’s become harder for businesses that don’t have the same resources as big companies to keep going. No one wants them to go away, because small business is what keeps our local economies going. Crowdfunding is a great way for small businesses to keep going and for people to help out their local economy.
When the SEC announced the changes, they wanted to make to the crowdfunding regulations, it’s not hard to see why so many of us were excited. It’s also pretty easy to see how it could help boost our economy. If you are running a small business that has been struggling due to the pandemic but haven’t tried crowdfunding yet contact us. Here at CrowdEngine, we provide you with the tools to create your own crowdfunding portal, whether it’s private or white label. Our goal is to help you become your own crowdfunding platform. If you’re ready to give that a try, contact us!
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