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Crowd funding coming are you ready

on January 09, 2012 Source: Kauffman Foundation

Let’s face some cold, hard facts.

Banks still aren’t lending much money, and venture capital cash, while spread more liberally in 2011 than in previous years, is still largely hard to come by.

The proof, as they say, is in the data:

  • The Federal Deposit Insurance Corp. reports that business lending is down for five straight quarters, and that loans to businesses valued at under $1 million have been in steady decline since 2008.
  • A September, 2011 study by Pepperdine University notes business owners ranked venture capital last among viable funding options. And a recent PriceWaterhouseCoopers study showed that life sciences funding fell by 18 percent during the third quarter of 2011.

But some help might be coming through an entity that has been missing in action over the past several years when it comes to small business financing: the U.S. Congress.

Last November, the U.S. House of Representatives passed legislation that would allow businesses to raise capital in small doses – up to $10,000 per investor. The vote, which passed by a whopping 407-17, has faced tougher sledding in the U.S. Senate, where elected officials grapple over language in the bill that would keep federal security regulators away from such “crowd funding” deals.

Right now, business owners who want to raise money for their firms through private investors have to register with the U.S. Securities and Exchange Commission. They also have to register with individual states where they do business.

But with the new legislation that is winding its way through Congress, business owners could connect with investors online, without any green light from Uncle Sam.

The proposed legislation does have some limits. For example, business owners couldn’t raise more than $5 million annually, and individual investments would really be of the grass-roots variety; investors could give the lesser amount of $10,000 or 10 percent of their annual income.

Some opponents of the bill say that the crowd-funding bill might open the door to fraudsters, operating without the spotlight from the SEC. Others say the $10,000 individual limit is too high. Sen. Scott Brown of Massachusetts has already offered a new bill that limits individual investments to $1,000, although total annual amounts could go up to $1 million under the Brown bill.

While the U.S. Senate may take its sweet time with the crowd-funding legislation, most advocates say some form of the bill will eventually pass. If and when that happens, be ready to strike.

A good blueprint of what smaller investors are looking for from a business seeking funding comes from the book “Angel Investing: Matching Start-up Funds with Start-up Companies” by Mark van Osnabrugge and Robert J. Robinson. To get your hands on $5,000 or $10,000 from select investors, make sure you have most of the items on this “Top 10” checklist from the book crossed off:

  1. Enthusiasm of the entrepreneur
  2. Trustworthiness of the entrepreneur
  3. Sales potential of the product
  4. Expertise of the entrepreneur
  5. Investor liked the entrepreneur upon meeting
  6. Growth potential of the market
  7. Quality of product
  8. Perceived financial rewards (for investors)
  9. Niche market
  10. Track record of the entrepreneur

Do that, and by the time Congress gets its act together, you’ll have a running head start at some potentially low-hanging financial fruit.

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