Crowd Funding Can Help Inventors Find Investors
{Don Debelak’s new book, Turning Your Invention into Cash is now available on Amazon for $3.49. Go to Amazon.com and enter inventions Don Debelak to purchase. From the author of Entrepreneur Magazine’s Bringing Your Product to Market.}
Monday the 16th, 2016 was the first day that crowd funding investor financing can start. Inventors and entrepreneurs can raise money from investors from crowd funding sites. Up until now inventors could only do reward based fund raise, which is where you take in an investment and then promise to send a product in the future once production has occurred. An example is Pebble’s Time smart watch which raised 20 million on Kickstarter in a reward based financing. Burt reward based funding only works when you have a product you can get made to furnish people. Products like a smartwatch, or a get a Carbon Flyer, a carbon-fiber smartphone-controlled airplane, which the inventors could get made under a contract manufacturing agreement. Trident, the maker of the Carbon Flyer, received 5,000 orders with a value of $430,000. But sometimes inventors want to start their own manufacturing company, or they need to finalize R&D, or possibly they need new manufacturing equipment. One of the issues with reward based funding is that buyers expect their product fairly quickly. The Carbon Flyer for example, ran into some production delays and had to issue refunds to 150 upset buyers. If your time to market is long, reward based crowdfunding doesn’t work well.
Which is where the new SEC regulations that allow people to raise money from investors for a share of the business comes into play. Under normal rules inventors and product entrepreneurs cannot publically solicit investors, and they can only take money from accredited investors, which are people with over $1 million in assets or with an income over $200,000. That’s not the easiest way to raise money as most inventor/entrepreneurs don’t know accredited investors. The new regulations allow people to use a funding portal, first to promote to accredited investors, and second to take money from non-accredited investors. Under the regulations non-accredited investors can invest $2,000 or 5% of their net income or net worth, whichever is less. There are a lot of regulations, but the funding portals, Of which there is only one that I know is currently listed, Start Engine https://www.startengine.com, but there are sure to be more to come. To keep current the rapid changes crowdfunding is sure to have, consider frequently checking on the web site Crowdfundinsider.com
While there are federal regulations, (for the whole regulation go to https://www.federalregister.gov/articles/2015/11/16/2015-28220/crowdfunding) your state might also have specific regulations. Visit your local Small Business Development Center, the SBDC, to check on local regulations. You can find your local SBDC center at https://www.sba.gov/tools/local-assistance/sbdc.
Highlights of the new legislation
- Issuers can raise up to $1,000,000 over a twelve-month period.
- Investors will have limits on the amount they can invest, based on their income or net worth.
Accredited investors, over $1 million in assets or an annual income of $200,000 per year can invest up to $100,000. Others can invest $2,000 or 5 percent of their annual income or net worth, whichever is less.
- Crowdfunding must be conducted through a registered broker dealer or a newly created funding portal.
To find out how to register for raising money as a funding portal go to https://www.sec.gov/divisions/marketreg/tmcompliance/fpregistrationguide.htm
- Broker dealers or funding portals must provide an online investing portal, where investors can view and vet companies, engage with the crowd and the companies through the portal.
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