I was in NYC in early October and met up with some fellow CfiRA (Crowdfunding Intermediary Regulatory Advocates ) members who have it on good authority that the Title III rules for federal equity crowdfunding will come out in October. Woohoo again! This means that you can add a federal crowdfunding campaign to your New Year’s resolution. In all seriousness, this opens up another channel for capital for startups and small businesses to raise money in the form of either equity or debt.
Almost nine months ago, I wrote a piece in Forbes about how many entrepreneurs have moved past waiting for the Title III rules and have either used state crowdfunding or other traditional angel groups or online broker dealer sites to raise money.
What is Title III Crowdfunding again?
To review, rewards-based crowdfunding is trading rewards, or sometimes products, for cash. Think Indiegogo or Kickstarter. At the end of the day, if you participate in a rewards-based campaign, you will not own any of the company. In other words, you are buying the reward.
Equity crowdfunding means you are receiving shares in the company rather than a reward. Title III crowdfunding can also mean that you are loaning the company money – that is why some do not like to call it Equity crowdfunding. But I digress.
If you need more background on what has been taking so long – please read this mid-2014 post, also in Forbes. So what do people not like about the rules that we've seen so far?
Costs too much
My biggest problem with the rules originally sent out may be addressed in the newer version of the rules set to come out later this October. Overall the preparation costs for crowdfunding - with no guarantee of success - seemed to exceed those costs when raising capital from angel investors. A large part of that outlay was for an independent audit or review of company financials, depending on the size of the raise.
Spending thousands on a review is difficult, particularly for an early stage or pre-revenue company. And since an audit or review has nothing to do with future performance, it would not add much to help investors. Fingers crossed that the new rules are more reasonable.
Gives up too much control
Under equity crowdfunding, a company is selling off ownership and that can mean control issues. A recent New Zealand article explores the balance between cash and control.
Many are now saying that debt will be a better route for owners wanting to raise cash but not actually sell shares. I maintain that many will use crowdfunding for the same product validation that rewards based campaigns provide. Also, it is likely that many small businesses will raise amount under $100K to get their businesses started and not need to raise a next round. However it unfolds, I'm happy that it is finally beginning.
So get ready, crowdfunding game on very soon!