For many people, one of the most difficult aspects of starting a new business is raising capital. You may have a great idea and a solid work ethic. But without funding, you might never have the chance to implement your business plan.
Currently, the startup model tends to rely on funding from venture capitalists, bankers and angel investors. But not everyone lives in a part of the country with ready access to these sources of funding, and their business idea may not promise the kinds of returns that some investors demand. For these reasons, financial news outlets seem cautiously optimistic about a new equity crowd-funding model recently approved by the Securities and Exchange Commission.
The best way to understand this new model is to compare it to existing crowd-funding sites like Kickstarter. On these sites, someone with a great idea (often a great product idea) can ask for investments from the internet at large. In return, investors are promised something tangible like one unit of the product being invested in (once it goes into production).
The SEC has just approved similar crowd-funding for business startups, only investors can secure equity in the business rather than a product. Nearly anyone can become an investor, but the SEC has placed limits on how much the average person can invest based on their income and total assets. These limits are meant to protect investors from losing too much money if the startup fails.
This crowd-funding equity model may prove viable, especially because crowd-funding is already popular and often lucrative. But until the details and bugs are worked out, entrepreneurs may still want to seek funding from venture capitalists and other, more traditional sources.
If you are starting a business, you can often receive good legal advice and help securing venture capital by working with an experienced business law attorney.