Wyoming Business Tips for Nov. 29

A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.

By Cindy Unger, WSBDC business adviser

“What is the current status of equity crowdfunding for small investors and the possibilities for a small business?” John, Casper

President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law three years ago. A set of draft rules covering equity crowdfunding was released two years ago that was widely criticized as being too costly and complex to implement.

Last October, the Securities and Exchange Commission (SEC) recommended final rules to permit companies to offer and sell securities via crowdfunding. Although equity crowdfunding has been legal for accredited investors, defined as individuals with an annual income exceeding $200,000 or a net worth of at least $1 million, small investors have been shut out of the equity game until now.

Their “investments,” made on websites such as Kickstarter, have typically been rewarded with sample products, special events or logo marketing specialties, such as coffee mugs and T-shirts.

After a 60-day comment period following the publication of the rules in the Federal Register, the commission will review the comments and determine whether to adopt the proposed rules. Under these rules, a company will be permitted to raise a maximum aggregate of $1 million, across all crowdfunding offerings, over a 12-month period.

An individual will be permitted to invest an aggregate amount of either $2,000, or a maximum of 5 percent of the lesser of his or her annual income or net worth, during a 12-month period. If income and net worth are greater than or equal to $100,000, an individual can invest the lesser of 10 percent of his or her annual income or net worth, up to a maximum of $100,000 in one year.

Securities purchased through crowdfunding transactions generally cannot be resold for one year. All transactions qualifying under the new rules will be required to go through either an SEC-registered broker-dealer or funding portal. Some specific companies are not eligible to sell equity in this manner.

Additional rules define the information that the company must disclose to the commission, investors and the intermediary facilitating the offering. Rules for operation of the crowdfunding platforms are also defined and also changes to intrastate offerings.

What will the effects of these new rules be? Family, friends, customers and others will be able to invest in ventures that they want to support, and companies will have new financial resources. The popularity and success of Kickstarter campaigns indicate that there is demand on the investor side for this kind of opportunity. Critics point out that the shares will be risky, illiquid investments, the majority of which will result in a loss for the investor. In addition, this process will not be free -- there will be costs to the company seeking the investment. What’s next? More news to come.

A blog version of this article and an opportunity to post comments are available at http://wyen.biz/blog1/.

The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email wsbdc@uwyo.edu, or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.