Even with all the regulated financial exchanges in the U.S., the small business community is mostly outside of the investment sphere. For all the attention that the financial news media gives to venture capital, investors do not usually find it easy to reach small business owners to inquire about investment prospects.
Outside of Silicon Valley and the reality television series Shark Tank, small business funding is not generally exciting. For the most part, small business owners still believe that commercial loans from banks are their best hope for startup funding; this is despite the fact that American banks have sharply reduced this type of lending over the last few years.
Thousands of entrepreneurs launch interesting startups each month, and yet only a few of them will make it past the first year of operations. Inadequate funding is one of the most common reasons behind the high rates of failure among American small business owners, and this can be blamed on the lack of diversity in terms of financing.
Equity Crowdfunding to the Rescue
With so many American businesses failing due to lack of funding, wouldn't it be great to have a marketplace where entrepreneurs and potential investors could interact with the benefit of regulation and oversight? Thankfully, that day has arrived.
In 2015, the Securities and Exchange Commission approved a set of rules to govern equity crowdfunding; since then, investors and entrepreneurs have been meeting with some hesitation on a few online platforms while regulators observe the action and make adjustments.
The adoption of equity crowdfunding is intrinsically tied to the legislation passed by Congress in the wake of the global financial crisis. As the situation stands these days, small businesses can raise up to a million dollars each year on crowdfunding platforms that have been vetted by the SEC.
In essence, equity crowdfunding mimics Wall Street on a small scale. Investors are fully aware that they are putting their money on new ventures that are looking to raise capital, but they have the added benefit of being able to acquire stock and even use the same platform to sell their equity stake if they wish to do so.
How Small Business Owners Can Leverage Crowdfunding
Although we are still in the early stages of equity crowdfunding, online platforms have already collected a good amount of business intelligence (BI) that they intend to make available to entrepreneurs. With BI technology, analysts can detect certain trends and patterns to help improve this new financial exchange.
If you are an entrepreneur interested in equity crowdfunding for your business, you should become acquainted with the process of due diligence that is required by the online platform. Insuring your company should be the first step, but you should also become familiar with the financial statements that potential investors will be looking for.
Yet another major benefit of equity crowdfunding is that it will introduce business owners to the intricacy of equity securities. The idea is to provide a valuable and practical education into how business finance works from Main Street to Wall Street.
Equity crowdfunding does not have to be the final stage of capital raising for small American businesses. Venture capital firms are paying close attention to the Web-based crowdfunding platforms because it gives them a great opportunity to scout new investment projects. From within these platforms, startup companies may find angel investors who will one day take them to Wall Street.