What is Crowdfunding?
Who has not heard of the Pebble Watch campaign? Over $10 million raised in a single Kickstarter campaign, a reward-based platform. Raising money either as a donation to a cause, by offering a reward in the form of a special event, or early access to a product are both common and legal forms of crowdfunding. The Pebble Watch campaign raise was an anomaly in terms of dollars raised. The watch was the reward and the funders financed its production.
In contrast, the “reward” under equity crowdfunding will be an ownership interest in the business. Equity shares will be issued instead of a watch or a donation and the person will become a shareholder. Under equity crowdfunding, there will be limits on the amount that the average person can invest based. However satisfying the income thresholds for accredited investors, the lowest being $250,000, will not be required.
Much has been written speculating when the SEC will promulgate the rules associated with the Title III of JOBS Act, which will allow equity crowdfunding to get started. We will not address this because the timing simply does not matter.
The “when” that does matter is when will entrepreneurs get started on becoming equity crowdfunding compliant. There is risk that the rules pass and there are not enough companies ready to go. The deal pipeline and the hundreds of funding portals will be empty.
What is Ready?
The list below are the items identified in the JOBS Act as necessary to pursue equity crowdfunding(1):
- Company must be registered and incorporated in the US;
- Names of the Directors, Officers, and any Shareholder with more than 20% of ownership;
- Business Description and Business Plan;
- Financial Statements with varying levels of attestation depending on the amount of money being raised;
- Prior year Tax Returns;
- Goal for Capital Raise and Target Dates (progress updates are also required);
- Planned Use of Capital Raised;
- Share Price and methodology for determining share prices;
- Detailed information on the Ownership and Capital Structure, including terms for the shares being offered under crowdfunding; and
- Terms of any other outstanding shares and the differences between those outstanding and those being offered.
It’s a long list and certainly not exhaustive because the SEC may add more requirements to protect investors and the public. But the likelihood that any of these items disappear from the list is just about zero.
Completing this list is not simple and it most definitely involves planning, consultation with outside help. The message is simple, get started now.
That said, gathering and organizing all these documents in one place and keeping it all up to date is a monumental task. Let’s focus on the business plan requirement.
First, having a current business plan is important to any business but much of the current startup or small business advice is to create a business model instead. However, those models are not in near enough detail to be equity crowdfunding compliant.
Second, anyone who has done a full-blown business plan realizes that often the plan is out of date shortly after completion. The exercise of discussing and modeling the business is often where the value lies for the company. However, for crowdfunding that business plan will have to be available to potential investors and must be up to date. Online business plans rather than models will be the way to proceed so that the contents can easily be updated. The fundingroadmap.com provides an online business tool that is Small Business Association (SBA) compliant and easily kept current.
Become Crowdfunding Compliant
The bottom line is that regardless of how entrepreneurs pursue raising capital in the future, having all of the bones in place (e.g., plan for your business, financial statements, and so much more) for a potential Crowdfunding campaign is essential.
Careful screening of startup and emerging businesses is critical for the long-term success of equity crowdfunding. The Hatchery is a private network that offers a simple way for entrepreneurs to list their investment opportunities with an Intermediary (registered Funding Portal or Broker/Dealer), for compliant deal flow. The Hatchery offers an integrated cloud based solution for transparency and due diligence disclosure requirements. The compliance checklist approach guides entrepreneurs through all the steps to become compliant.
The Hatchery has gathered the Crowdfunding value-added service providers for both pre and post-funding stages. Some of these innovative service providers are Crowdcheck for background checks and Traklight for intellectual property (IP) identification and protection. These tools and services aid in assessing the credibility of businesses. Each business is scored based on completing the compliance checklist.
The pre-screening process conducted by Intermediaries (registered funding portals and Broker/Dealers) will provide investors a high quality of deal flow, while introducing Issuers to the investing public. Using the checklist will differentiate these businesses from others who have not undergone the same rigor.
The above list of requirements is daunting, especially for those who have used rewards based crowdfunding. However, with proper planning and using the new resources such as the Hatchery, companies can be ready for equity crowdfunding as they advance their businesses.
For more information on Crowdfunding, please check out our free webinar, "Avoiding Mistakes and Preparing for Equity Crowdfunding with Indigogo, Crowdnetic, and Traklight" Tuesday, Sept. 17th at 12:00pm AZ time!
The http://www.crowdfundingroadmap.com is a great place to start as it will increase your chances of finding a registered Funding Portal or Broker/Dealer partner and make your business more attractive to raising capital, while allowing your management team to operate from a position of strength and most importantly, increasing your chances of getting fully funded. Come learn more at the 2nd Annual Global Crowdfunding Convention and Bootcamp. Register today - last chance for summer prices!
(1) Thank you to www.crowdfundingroadmap.com for the minimum requirements list.