Restaurant Law Blog

Thursday, November 21, 2013

New SEC Proposal Allows Restaurant Owners to Solicit Investors Through Crowdfunding

Crowdfunding is becoming an increasingly popular way for business owners to gain the financial backing they need to turn their concepts into realities. In recent years, websites like www.kickstarter.com have helped thousands of entrepreneurs obtain access to the funds they needed to get their projects off the ground. With the internet age upon us, the ability to reach people (and beg them for a few dollars) is easier than ever. However, would-be restaurateurs have not been as successful as other small business owners seeking financial backing in these arenas. Unlike other business owners, restaurant owners often need significant sums of money to open their doors. A donation of $10 in exchange for a coupon or a tee-shirt is not typically going to raise the amount of capital needed for a restaurant. But what if you, as a restaurant owner, could solicit true investors in exchange for a piece of your company?

The concept of investing using the internet crowdfunding model is a fairly recent development, and regulations have not quite caught up to all the hype – until now. Traditionally, private companies could only solicit investments from accredited investors (i.e., anyone with a net worth of $1 million, excepting the value of his/her home, or anyone with an annual income over $200,000). However, the passage of the JOBS Act in 2012 eased restrictions on investors in an effort to encourage small businesses. Under the same Act, the SEC was to propose rules by the end of 2012 to address issues involving equity crowdfunding. Finally, after much delay, the SEC has come back with a proposal.

Yesterday, the Securities and Exchange Commission voted unanimously to propose rules that would allow unaccredited investors to buy stock in private companies over the internet using a “funding portal.” The idea behind the funding portal is to allow a way for the public to invest in small businesses while still offering those investors some protections.

Key elements of the funding portal would include a $1 million cap every 12 months on monies raised through crowdfunding. Investors who make less than $100,000 in annual net income would be able to invest up to 5% of that income, and those who make more than $100,000 could invest up to 10%. Most importantly, small business owners will now be able to solicit investments from the general public via the internet. There will now be a 90-day comment period followed by a final meeting of the SEC for ultimate approval.


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