Black Businesses To Have More Access To Capital

Black Businesses To Have More Access To Capital

Overview

by Carolyn M. Brown

Access to small business capital for minorities will significantly change since the SEC is finally passing Title III Crowdfunding, opening up the doors to an even wider pool of investors for small businesses and minorities.

The U.S. Securities and Exchange Commission voted 3 to 1 to finally allow all non-accredited investors (those who have less than $1 million in assets) to invest in private offerings for the first time in 80 years.

Small firms and startups can now solicit anyone, regardless of their location, net worth or wealth, thereby giving small investors a chance to invest in what may be the next Facebook or Google. It also means the daycare center or restaurant down the street can now offer ownership stakes, or shares of stock, to their most supportive customers and clients.

“This is great news for women and black-owned firms, which tend to be small and capital starved,” says William Michael Cunningham, founder and CEO of Creative Investment Research Inc. in Washington, D.C., and National Crowdfunding Resources. “The SEC vote approving rules to implement Title III of the JOBS Act means greater opportunity for minority, women, and veteran firms to obtain equity funding.” This legislation will give minority businesses even more access to capital through an even greater pool of investors.

[Related: 10 Things Black People Need To Know About Crowdfunding]

Minority-owned businesses are vital to the American economy, even though it was just reported last year that African American companies earned the lowest share of funding from investors out of all of the minority groups out there, and that Venture Capitalists are still primarily interested in funding all white-owned companies.

After over three years of delays, the Securities and Exchange Commission (SEC) voted to finalize rules on Title III of the JOBS Act. There are currently two crowdfunding related laws that startups and small businesses may utilize today, with Title II accredited crowdfunding and Title IV Reg A+ with non-accredited investors. Under Title IV of the JOBS Act, the U.S. Securities and Exchange Commission proposed rules to allow small and medium-sized companies to raise up to $50 million via crowdfunding.

But many in the crowdfunding industry see Title III as the true non-accredited equity crowdfunding laws, given their greater ease of use for early stage startups as compared to Title IV.  Title III allows companies to raise up to $1 million with non-accredited investors. Previously, only the “exclusive group” of accredited investors were allowed to do private offerings in Crowdfunding. This pool of “exclusive, high-end” investors was very limiting since all investors do not fit this category of net worth.

In addition to allowing firms to raise capital from anyone via a crowdfunding platform (a Financial Industry Regulatory Authority or FINRA registered internet website set up specifically for this purpose), Cunningham notes that the SEC also approved rules making it easier for companies to sell stock in small or startup companies to potential investors residing in the state in which the startup (or small firm) is located. This is another potentially beneficial capital raising option for black owned firms, which tend to be hyper-local.

“The new rules are not without drawbacks, however, crowdfunding platforms will be allowed to accept stock in lieu of payment for capital raising services provided,” he says. “So, small firms will have to watch out for crowdfunding platforms that charge say 50% of your stock to help you get funded. Given the lack of brokerage firm ethics we saw in the years leading up to the financial crisis, this is a serious issue, but the potential for good far outweighs the downside.”

Raising equity or selling ownership shares is a very difficult and complicated task, mainly because of the convoluted rules governing how you can do so, adds Cunningham, who also is the author of The JOBS Act: Crowdfunding for Small Businesses and Startups. “The SEC action makes it a little easier to get the capital needed to launch (or enlarge) your firm.”