There has been a growing force in investments the past five years, and now Illinois is prepared to offer the ability for small businesses to receive funding from a large number of individuals via a strategy known as crowdfunding. The Illinois Crowdfunding Law allows companies to raise up to $4 million from Illinois nonaccredited investors—those who do not meet income or net worth requirements.
Crowdfunding opens new investment opportunities to the little guy. “Crowdfunders” receive equity or a debt position in the company. They are not mere donors offering support, receiving only a nominal reward in return.
Crowdfunding itself is not a new strategy. In fact, real estate deals have utilized the equity available through crowdfunding for years, in part due to the ease of assigning a value to projects. This Illinois legislation, however, widens the types of companies equity crowdfunding can support.
Equity crowdfunding opens new horizons for small investors, allowing ordinary people from Illinois to put in up to $5,000 for a small piece of a promising company.
Crowdfunding may revolutionize how local business raise capital. Locals can invest in their favorite restaurant or renovate an apartment building, forging a deeper sense of loyalty and building brand awareness within the community.
Perhaps more importantly, it is estimated that crowdfunding creates one new job for every $37,702 invested. Crowdfunding is projected to contribute $500 billion in funds by 2020, according to Illinois Intrastate Equity Crowdfunding Resource Center. Experts believe it could take three to 10 years before we get an accurate, long-term picture of how crowdfunding performs.
There are, however, risks associated with crowdfunding. The additional complexities inherent when hundreds or thousands of small investors are involved can deter the seasoned investor.
As with any business venture, losses, failures and bankruptcies will occur and could receive increased exposure due to the novelty of the practice. Further, there are legal considerations, including tax implications, as well as the possibility of contract and fraud pitfalls.
Due to the complexities and the relative novelty of the law, it is a good idea to consult with an attorney before utilizing crowdfunding as either a form of investment or deciding to invest in a crowdfunding venture. In the future, I hope to write on recently enacted federal law on crowdfunding.
This article is to inform and raise awareness. It should not be considered legal advice. For specific legal advice, please contact Sivia Business & Legal Services at 618-659-4499 or email at email@example.com.