How It Could Impact Small Businesses

The Securities and Exchange Commission is considering a rule change that could make it easier for small businesses to raise money with crowdfunding.

The Small Business Capital Formation Advisory Committee discussed the potential rule change at a recent meeting, though the change has not yet been officially approved. Basically, adopting the change would raise the limit for raising money via crowdfunding without independently certified financial reports. Currently, businesses can request up to $124,000 without this extra documentation. Businesses are free to raise more than that, but they would need to generate this additional documentation, which often comes with extra costs – sometimes up to $10,000, along with extra time and resources from the business. The proposed change would allow businesses to request up to $350,000 before this requirement kicks in.

The requirement is in place for good reason – to protect those who might invest in crowdfunding campaigns from fraud. The SEC doesn’t want businesses to be able to request unlimited funds without providing any documentation about their financial needs and what the money may be used for.

However, the current limit has been in place for years. And many financial factors, like inflation and the difficulty that many small businesses have in applying for traditional bank loans, have caused the committee to consider an increase.

Committee Chair Erica Duignan said during the recent hearing, “We don’t want to eliminate the requirement, but rather eliminate the requirement where it’s onerous.”

George Cook, co-founder and CEO of crowdfunding platform Honeycomb Credit and member of the SEC committee also said, “Access to capital by traditional providers is essentially gone. The better capitalized the business, the better the outcome.”

The hope is that this proposed change could increase investments in small businesses and ease the strain on those who may need to borrow significant amounts. Instead of the money they raise going toward independent financial reviews and other fees, they can dedicate more funds to improving their operations and putting money back into the economy.

The rule change is not yet official, and there isn’t currently a date set for reviewing the proposal. But if enacted, the new limit could open new doors for small businesses and make crowdfunding a more attractive option for raising capital.

Image: Envato

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