Dive Brief:
- Starting this week, small companies and startups can now raise money from "ordinary investors" by selling shares in their business, up to $1 million online in a 12-month period, per the 2012 Jumpstart Our Business Startups Act. Previously, only accredited investors could participate in such offerings, reports The Wall Street Journal.
- The new fundraising rules require companies to work with a registered broker-dealer or approved funding portal. Crowdfunding sites like Indiegogo and AngelList.com have expressed interest, but Kickstarter will not be participating.
- The new crowdfunding initiative may take time to establish, partially due to how new and complex the process is in addition to higher costs and disclosure requirements.
Dive Insight:
Barriers to entry could keep many startups out of this investment circle. Companies will have to disclose financials and how they will use the proceeds from the offering in addition to publicly filing annual financial statements that have been verified independently or even audited. Startups don't have to jump through all these same hoops when working with Kickstarter or wealthy investors, so they may not take advantage of the new opportunity.
While not all entrepreneurs will want to work with a large number of smaller investors, these companies may connect with consumers on a more personal level. This enhances the relationship startups have with their customers and investors.
But what does this mean for major manufacturers? Startups could become market share competition in a particular category without the manufacturer having a hand in the company's growth. They could also lose the chance for a smooth acquisition down the line.
On the other hand, startups could ignite early growth without manufacturers having to make an early (and risky) investment. Then, when the timing is right for an optimal return on investment, a manufacturer could acquire the startup when it proves its longevity. The larger company can expand its own portfolio without ever having to risk its own investment funds on a startup that could potentially fail, as many do.