Equity Crowd Funding 101

Crowd-Funding
How Hispanic entrepreneurs can join the crowd to raise money for their companies

 

Graphic: Fotolia

 

You need to raise money to fund and grow your Hispanic small business. You have come up with a proposed investment structure and are contacting some family members, friends and local business contacts to see if they might be interested in investing. A few of them have stepped up as potential investors, but you need to find more investors to attract the necessary investment to achieve your business goals.

Now you understand the advice from other entrepreneurs who have told you that finding investors and raising money for your company will be among the biggest challenges that you will face as a small Hispanic business owner.

But you have read about the recent crowd-funding phenomenon and are intrigued about using the Internet to extend your reach to additional investors. After digging around, you learn, however, that the companies using crowd funding have not been selling shares or ownership interests in their companies to the crowd funding participants.

In fact, the Federal securities laws currently do not allow you to use the Internet to sell your company’s shares, because you cannot engage in “general solicitation” or “general advertising” to reach out to and contact other sources of investment capital. Casting a wide net to potential investors over the Internet would create a public offering situation, and your company then would not have the protection of an exemption from the requirements to register your shares with the Securities Exchange Commission (SEC).

A big change to these pre-Internet financing laws has been set in motion–equity crowd funding is coming. On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act).

The JOBS Act is designed to help small and emerging growth companies by streamlining the investment process to raise money both in private and public offerings. For small businesses, the new crowd funding exemption will allow private companies to sell securities and raise money over the Internet, although in a highly regulated manner. The SEC presently is working out the details of the implementing regulations for the equity crowd funding exemption and it is expected that the regulations will be available towards the end of this year or the first part of 2013.

This new crowd funding exemption has the potential to provide small businesses with greater access to startup, working and growth capital. Many Latinos and other business owners have struggled in their efforts to raise money for their companies, especially recently with the reduced access to bank credit and equity investment. While the JOBS Act will provide an important funding alternative for small companies, it will be critically important to determine how to navigate the upcoming regulations, so that equity crowd funding becomes a viable alternative for more small businesses that have not had adequate access to investment capital.

Upcoming Webinar: Equity Crowd Funding Is Coming.

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About the author

Carlos Jose Heredia

Carlos D. Heredia an attorney, helps Latino entrepreneurs and small businesses start, manage and grow their companies. Over the past 20 years, Carlos has worked with over 500 companies in various industry segments, including consumer products, retail, software and e-commerce.  He has helped these companies at the startup phase, during the various stages of growth and financing (such as seed, angel and venture capital rounds), and when they get acquired or go public. Carlos uses this experience to help Latino entrepreneurs and small businesses launch new companies, raise money and achieve business success. Carlos and his wife Maria are the principals of California Counsel Group, Inc., a law firm located in San Diego, California. They also have a blog. Carlos graduated from UCLA (BA, Economics-Business), Stanford Graduate School of Business (MBA) and Stanford Law School (JD).  He looks forward to serving as a resource for new and growing companies.

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