The boom times of the past several years may create the impression that just about every startup with half a business plan can get funding, but the truth of the matter is that many startups desiring to raise capital from investors are unable to.
There are plenty of reasons for this. Some startups, for instance, realistically don’t have what it takes to convince investors that they’re viable investments.
For many if not most of these startups, founders, family and friends simply can’t pony up enough cash.
But if legislation working its way through the Congress in the United States gets passed, startups will have many more options.
The Entrepreneur Access to Capital Act, which was passed by the House of Representatives yesterday, would basically create exceptions to the current securities laws that prevent companies from soliciting investment from individuals who aren’t accredited investors.
Under the act, a company could raise up to $1m without having to register an offering with the Securities and Exchange Commission. Companies willing and able to provide audited financials would be able toraise up to $2m. What’s more: the Entrepreneur Access to Capital Act investment would permit individuals to invest small amounts (up to $10,000 or 10% of their annual income) even if they don’t meet the legal definition of an accredited investor.
If passed, the legislation would obviously open up the doors for companies funded not by angels and VCs, but by their own customers, users and supporters.
A promising internet startup might be able to quickly raise $250,000 in seed funding from its most loyal users at terms far more favorable than it could get from angels or VCs. Or a quirky inventor with no shot at raising money from professional investors might find the $100,000 he or she needs to build a prototype of a promising new device.
Needless to say, passage of the Entrepreneur Access to Capital Act would be a good thing for entrepreneurs in the United States — and not just those in the technology industries. Yes, you can be sure that someone somewhere would use this newfound ability to run a scam.
And there’s the possibility that crowdfunded startups with potentially dozens if not hundreds of shareholders would later find it difficult to raise additional funds from professional investors if needed, but none of these concerns should distract from the many benefits of allowing companies to raise capital from the general public.