Equity crowdfunding is a new way for businesses to raise capital. It allows investors to invest in the company they believe in, and that has led to companies like Airbnb raising over $100 million with their initial public offering (IPO).
Reward-based crowdfunding is a new way for startups to raise money. It allows users to invest in startups based on the potential of their idea rather than just the company’s financial performance.
Are you a budding entrepreneur with a cash-strapped business? Could a flood of cash and publicity help your company grow? Then, the Securities and Exchange Commission’s proposed equity crowdfunding regulations are revealed, revealing a cure for expanding your company’s coffers.
The Securities Act of 1933 and the Securities Exchange Act of 1934 are amended by the SEC’s proposed rules (mandated by the JOBS Act of 2012) to allow the offer and sale of securities through an internet crowdfunding campaign, similar in some ways to donation crowdfunding campaigns conducted on Kickstarter and Indiegogo.
Both donation and equity crowdfunding appeal to the public’s desire to share in the success of others’ business dreams.
Whether they’re launching the next internet sensation, filming a sci-fi fantasy, mass producing savory barbecue sauce, or inventing a must-have tech gadget, entrepreneurs will benefit from this enthusiastic support—not only from public funds, but also from their subsequent purchases of the products they help create.
If your company requires money, try equity crowdfunding; its unique characteristics will entice investors seeking investment returns and investor protection, as well as the goodwill created by their participation.
Donation crowdfunding vs. equity crowdfunding
In two key ways, equity crowdfunding differs from contribution crowdfunding. Unlike donation crowdsourcing, which permits just a small amount of money in return for contributions, equity crowdfunding involves the offer and sale of debt or equity instruments in exchange for funds.
Additionally, a fundraising company that offers and sells securities must follow the SEC’s (Securities and Exchange Commission) rules. The SEC’s proposed equity crowdfunding regulations govern, among other things:
- Your company (the securities issuer)
- Your company’s securities offering is facilitated by an intermediary (the broker-dealer or funding portal)
- The financiers
By the end of 2014, the SEC hopes to have finalized its equity crowdfunding regulations. This article covers the six actions you can take right now (plus one you don’t want to do) to improve your preparedness for equity crowdfunding when the new regulations take effect.
- Set a Fundraising Objective
- Make a business plan.
- Expand Your Network
- Conduct a background check
- Engage the services of attorneys and accountants.
- Invest in Upfront Costs
Once your company begins the process of selling securities to prospective investors, your compliance responsibilities will skyrocket, so get started now.
1. Establish a Fundraising Objective
The proposed equity crowdfunding regulations enable your company to raise up to $1 million in total through equity crowdfunding campaigns over the course of a year.
[pullquote] According to the proposed equity crowdfunding regulations, your company may raise up to $1 million in a 12-month period… [/pullquote]
Because of this restriction, your securities offering may not be sufficient to meet all of your company’s financing requirements; thus, you should consider equity crowdfunding as only one of many weapons in your company’s funding armory.
Furthermore, before you hurry to raise any money for your company, you must first answer two critical issues for crowdfunding success:
- Is this a good number to generate money for my company?
- Does my company have the resources it needs to run an equity crowdfunding campaign?
Choose a Strategic Goal Amount:
Assume you operate a craft brewery in need of capital to launch a new line of speciality beers, and you have the necessary money to engage in equity crowdfunding.
To begin, decide on a minimum amount to raise and a deadline for raising that amount. The goal number is the minimum amount your company wants to raise. If your brewery does not reach its fundraising goal by the deadline, it will get nothing.
You figure out that your brewery will require $250,000 to get its beers into other markets, and you set a fundraising deadline to guarantee that your brewery’s first special project is bottled and delivered before the season begins. The three scenarios below show the outcomes of three distinct fundraising strategies for a total of $250,000.
Scenario 1: Your company sets a deadline of April 30, 2016 to raise the $250,000 it needs. Your company has raised $250,000 as of February 25, 2016. Your company makes a profit of $250,000. Congratulations! Scenario 2: Your company sets a deadline of April 30, 2016 to raise the $250,000 it needs. Your company had only raised $225,000 as of the deadline date. Unfortunately, since your company failed to achieve the whole goal amount by the deadline, it will be unable to receive any money and will have all pledged funds returned to investors. As a result, you’ve been forced to postpone the launch of your brewery’s new product line.
A unsuccessful campaign costs time, money, and opportunities that cannot be recovered. You should strategically decrease your brewery’s optimum goal amount while simultaneously declaring a maximum offering amount to reduce the odds of failing. The maximum offering amount is equal to the target amount plus any extra funds your company wants to raise once it reaches its goal.
Let’s take a look at what occurs when your brewery uses the maximum offering amount strategy to raise $250,000.
Scenario 3: Your company sets a deadline of April 30, 2016 to raise the $150,000 goal amount. Your company has raised $150,000 as of February 25, 2016. (which it will collect). The next step is for your company to raise an extra $100,000. The maximum offering amount is equal to the goal amount + $100,000. Your company has only raised $75,000 of the extra $100,000 sought as of the deadline date. Despite the fact that your company did not raise the full amount of its offering, it nevertheless received $225,000. Success! Furthermore, the majority (if not all) of your brewery’s ambitions will be supported.
In the world of equity crowdfunding, one rule reigns supreme: your company must raise at least its goal amount to get any money. However, as the example above illustrates, your company may still obtain money even if it falls short of its maximum offering amount.
Because the goal amount may be achieved at a lesser dollar amount, using the cautious maximum offering amount method will usually provide the best long-term results.
Examine Your Company:
As previously said, the success of your company in collecting equity crowdfunding funds establishes the campaign’s worthiness, which is determined in part by establishing a suitable goal amount.
A poor equity crowdfunding campaign is one that just aims to gather any money. A successful campaign generates enough revenue to cover your operating expenses as well as meet your most pressing business requirements. Use the following checklist as a guide for determining an acceptable goal amount:
- Create an internal budget for your potential equity crowdfunding funds.
- To choose a reasonable minimum goal amount, itemize and prioritize requirements inside your internal spending plan (and maximum offering amount)
- Examine your company’s financials, administrative capabilities, compliance capabilities, regulatory duties, and other business responsibilities.
- Determine how much money your company can gather in a reasonable period of time.
- Examine the campaign’s administrative and financial expenses.
To repeat, expenses may account for a substantial portion of your company’s equity crowdfunding profits, and they must be included into any decision about how much to raise.
According to the SEC, the intermediary charge, which is one of the higher required business expenses, may eat up to 15% of the securities offering. As a result, the $37,500 in intermediary fees for your brewery’s $250,000 securities offering may be $37,500. Other expenses, like as legal, promotional, and accounting fees, may eat up a significant portion of your crowdfunding budget.
Recognize the Worth of Your Company:
Additionally, you must align your company’s strategic fundraising objectives with the company’s value and share price.
What is the value of your company? That is the most important question. At the very least, assess the worth of your company based on an examination of its financial records and the perspective of a potential investor. What share value or share price encourages people to buy? Your company’s intrinsic worth or prospective investors’ assessment of your company’s value is also important.
You should also think about what you’re offering to investors: is it a piece of your company or a piece of its particular assets? Selecting your company’s pricing mechanism and determining the appropriate number of investors to manage are other significant considerations.
Your idea of value is entwined with your company’s securities offering statement, which explains the terms of your crowdfunding securities to prospective investors. As a result, the following will be included in the material terms of your company’s securities offering statement:
- Types of securities
- Rights of cancellation and reconfirmation
- Class should be shared.
- resales of securities
- Price of purchase
- Right to vote
Complete the Equity Crowdfunding Budget:
Disclosure requirements are triggered by equity crowdfunding campaigns that are related to your company’s maximum fundraising objectives. The proposed regulations require your company to provide prospective investors with a complete knowledge of any possible equity crowdfunding proceeds at the same time as announcing a target amount (and a maximum offering amount, if applicable).
This is the final budget for your company’s equity crowdfunding campaign. If the expenditure justification fails under examination from prospective investors, setting an indiscriminate goal amount places your company’s campaign in a bad light (or the intermediary).
As a result, be ready to defend any financing request stated in your company’s budget. Will the public rally behind an up-and-coming craft brewery that wants to mass-produce four slightly different squash-flavored beers—pumpkin, acorn, butternut, and winter medley—and transport them from Anchorage to Accra?
2. Create a business plan
The fundamental feature of equity crowdfunding is a public gathering (although virtual) to assess the value of your company’s securities offering. To that aim, the new equity crowdfunding regulations require your company to publish its business plan so that potential investors may have an educated conversation.
[pullquote] According to the proposed equity crowdfunding regulations, you must publish a business plan… [/pullquote]
At the very least, your company must provide a description of its initiative, concept, or business for the public to investigate (disclosure of a traditional business plan is not required).
Don’t use this minimal requirement to justify concealing a relevant image of your company from the public—doing so contradicts the objective of equity crowdfunding and may deter potential investors from purchasing your company’s shares.
Complying with crowdfunding laws and selling a suitable number of crowdfunding securities are two goals to keep in mind while writing your crowdfunding business plan. In order to get crowdfunding investors to invest in your company, include the following in your business plan.
Specify the Reasons for Funding Requirement That Are Allowable:
Fortunately, virtually any company, concept, or initiative is fair game. You just need to choose one. Be cautious—detailing intentions to participate in mergers or acquisitions with unnamed businesses may disqualify your company from issuing or selling crowdfunding securities.
Create a succinct mission statement for your company:
In a few words, communicate the value of your company in a captivating manner and strategy. A strong mission statement motivates people to believe in your company’s vision before they consider its worth.
Promote Your Company’s Advantages:
Your business plan is an excellent opportunity to showcase your leadership and creative abilities, product innovation or utility, business or technological development skills, and proven interest from relevant parties. Superior business abilities pique the interest of potential investors in your company’s crowdfunding campaign.
For many small and developing companies, there is very little information available to help them make a securities purchase choice. When there isn’t much to go on, an appeal to pathos may help a lot.
Leaving out proprietary and confidential information is a good idea.
The Securities and Exchange Commission (SEC) does not require proprietary or secret information to be included in a crowdfunding business plan. Remember that the public (including your company’s rivals) will have access to information about your company, therefore you must avoid disclosing private or secret information to satisfy the public’s curiosity.
3. Expand Your Contact List
Make a Connection:
The success of your equity crowdfunding campaign is mainly determined by the strength of your company’s network. Business networks that are effective are numerous, wealthy, and active.
Strive to build a large business network that will both purchase adequate quantities of crowdfunding securities and promote your company’s crowdfunding campaign to others.
[pullquote] The success of your equity crowdfunding campaign is mainly determined by the strength of your company’s network. [/pullquote]
So, the obvious issue is: do you still need to build a large network if just a few individuals purchase massive quantities of securities? No, but only if your company’s network is wealthy. For the most part, this is a fantastical scenario. The proposed equity crowdfunding regulations set a cap on the total number of shares a person may buy in a 12-month period in crowdfunding securities offerings, which varies depending on their yearly income or net worth.
- People with an annual income and net worth of less than $100,000 may invest up to $5,000 each year, or the greater of $2,000 or 5% of their annual income or net worth.
- People having an annual income or net worth of $100,000 or more may invest the larger of 10% of their annual income or net worth over the course of a year, but not more than $100,000.
How many investors does your company need to get equity crowdfunding funds? What is the average amount that each person in your business’s network can invest, given their financial situation? You should also expect these individuals to invest in other types of crowdsourcing assets.
Let’s suppose you need to raise a large sum of money for your brewery once again. Remember that your brewery only receives equity crowdfunding funds if it meets the goal amount by the deadline. Let’s take a look at the four scenarios below to see how network size and securities offerings influence the average amount each individual needs contribute in order for your brewery to achieve its goal.
Scenario 1: Everyone invests $2,000 on average in your brewery’s $1 million securities offering. To reach your goal, your brewery will require 500 network members.
Scenario 2: In your brewery’s $1 million securities offering, each individual contributes an average of $500. To reach your goal, your brewery will require 2,000 network members.
It’s also worth noting that a smaller equity crowdfunding campaign may not relieve you of your need to build your network—smaller offers are more likely to attract investors who are willing to spend less money.
Scenario 3: Everyone invests $500 on average in your brewery’s $250,000 stock offering. To reach its goal, your brewery need 500 network members. Scenario 4: In your brewery’s $250,000 securities offering, each individual contributes an average of $125. To reach its goal, your brewery now needs 2,000 network members.
Of course, don’t anticipate everyone in your company’s network to purchase crowdfunding shares, or that your company’s network would provide all of your investors. Once you’ve calculated the number of network members or investors you’ll need to succeed with crowdfunding, start networking with real-life and online connections (both social and professional).
Consider these early network members as collaborators who, if properly engaged, may assist you in pitching your equity crowdfunding campaign on the intermediary’s communication channel (the internet forum where the general public can debate your company’s securities offering).
Engage Your Social Media Network:
The development of a passionate network to finance your company’s crowdfunding securities offering must be the cornerstone of your crowdfunding strategy plan. Create and distribute news about your company to keep people interested in your efforts. The internet provides a simple, cost-effective, and perfect venue for sharing your company’s story. This important and powerful story acts as a magnet, drawing and keeping individuals to your company’s network. A professional business website is also critical to your company’s story, since it serves as a basic measure of legitimacy and viability for many.
Your interactions and networking on social media sites like Facebook, Google Hangout, and Twitter are likely to account for the majority of your network’s retention and growth. They provide a better form of public communication since you are the only one who can design the message you want the public to hear, and direct encounters enable the public to have a stronger bond with your company.
Under the proposed rules, the intermediary’s communication channel—a type of social media—will be the primary location for your company to discuss its crowdfunding securities with the public (only very limited advertisements of the offering are permitted outside of the intermediary’s communication channel).
Importantly, this restriction does not apply to non-crowdfunding-related company conversation or promotion. As a result, your company may continue to utilize social media to foster connections and provide information. Once your company starts offering crowdfunding securities, you may easily notify your engaged network that they can buy and sell such shares on the intermediary’s internet platform.
4. Conduct a background check
Saving investors against the risk of fraud and other wrongdoing requires, in part, a thorough examination of your company for red flags. As a result, under the proposed equity crowdfunding regulations, the intermediary is required to perform a background and securities enforcement regulatory history check on some of your company’s covered individuals. Due to this requirement, reconsider your company’s participation in equity crowdfunding if its negative history would prohibit or discourage the public from purchasing its shares. However, if you can use the negative facts to your advantage, go ahead and continue.
Before you choose an intermediary to help you with your company’s securities offering, make sure you have a strategy in place to deal with the repercussions from the background check.
Three questions can assist your company in overcoming any obstacles:
- Has there been any wrongdoing in my company?
- Will my company’s securities offering be jeopardized as a result of this misconduct?
- What would I do if my company had a history of misconduct?
Identify the people who will be subjected to background checks:
According to the proposed regulations, the following entities and titled people (as well as untitled persons performing comparable tasks) are covered persons:
- Your company, as well as any predecessors or related companies
- Directors, officers, and general partners or management members of your company
- Beneficial owners of your company (those who hold 20% or more of the company’s outstanding voting shares)
- Promoters that are interested in your company’s offering
- Solicitors who are compensated, as well as their directors, officers, general partners, or managing members
The previous conduct of just certain of your company’s covered persons—in particular, your business and its officers, directors, and beneficial owners—is crucial to passing the intermediary’s background and securities history check. It’s worth noting that the previous actions of your company’s other covered individuals may potentially derail your securities offering.
Recognize Unfavorable Backgrounds:
Following the identification of your business’s covered persons, conduct a background and securities history check or other factual inquiry to uncover any history of criminal or civil misconduct (this also allows you to correct any system inaccuracies) and to assess the impact of any misconduct on your business’s crowdfunding campaign.
A disqualifying incident is a misbehavior that necessitates either exclusion from equity crowdfunding or notification of the misbehavior. The following are examples of events that might disqualify you under the proposed rules:
- Convictions for certain crimes
- Injunctions and restraining orders issued by the courts
- a number of final orders issued by certain regulators
- The United States Postal Service (USPS) has issued a number of false representation orders
- Disciplinary and cease-and-desist orders issued by the Securities and Exchange Commission
- Orders and stop orders issued by the SEC in connection with SEC Reg. A
- SRO membership suspension or expulsion, or connection with an SRO member
On the SEC’s website, you may find a longer list of disqualifying occurrences that are comparable to the proposed equity crowdfunding regulations.
If your business’s covered people engaged in a disqualifying act prior to the adoption of the crowdfunding rules, such disqualifying acts do not prohibit your company from selling crowdfunding securities on their own.
Nonetheless, for two reasons, you must continue to identify covered individuals with unfavorable histories. First, these disqualifying events must be disclosed in your company’s securities offering documents. Second, your due diligence may save your company from SEC penalties if an unforeseen disqualifying event occurs later.
Recognize the Consequences of Adverse Backgrounds:
Even if the misbehavior done by your business’s covered people is not a disqualifying event, the intermediary and the public may infer that such actions implicate your business’s crowdfunding campaign in fraud or other violations. This logic may also be extended to the problematic history of all individuals connected with your company by the middleman and the general public (not just covered persons).
Under the proposed regulations, the middleman and the general public have a lot of authority. The intermediary may reject or withdraw your company’s securities offering from its platform based on a judgment—not necessarily a reasonable belief—that the offering looks to be fraudulent or lacks a commitment to investor protection.
Do you need assistance in obtaining financing for your company?
How to Pitch and Get Funded is a free eBook that you may download.
Moreover, the public with concerns about your firm may refuse to purchase your company’s shares or, worse, publicly criticize your company’s securities offering via the intermediary’s communication channel. What will be your company’s reaction to such a decision? Prepare to communicate civilly with the intermediary and the general public about any concerns (fair or not) that arise about your company.
Overcome a Difficult Past:
Prior to choosing an intermediary, you must first identify all covered individuals with a troublesome background in order to plan a positive result. The actions below may assist your company’s securities offering by showing a commitment to compliance:
- For the approval of the middleman and the general public, create a winning story that supports your company (and the individual, if still connected). This also rallies the public behind your company’s securities offering before it fabricates its own narrative about your company’s negative history.
- Emphatically and passionately demonstrate your company’s principles of honesty and dedication to compliance.
- Reject the previous methods and culture that resulted in previous wrongdoing.
- Exclude impacted individuals from covered positions by restructuring share ownership to less than 20% beneficial ownership, transferring their work responsibilities to non-covered activities within the company, or firing them.
If the intermediary is unconvinced by your company’s increased commitment to compliance, fine-tune your presentation and find an intermediary who is interested in your securities offering (which includes your company’s negative history).
5. Engage the services of attorneys and accountants.
Long-term equity crowdfunding success means securities regulatory compliance plus increasing earnings. Obtain help with the compliance needs from securities regulatory lawyers and accountants. Using this legal and accounting guidance will show that you are serious about planning a legitimate securities offering. Prioritizing legal problems is critical because it helps your company avoid SEC investigations and penalties, investor discontent, and intermediary disputes, which are the three main legal risks associated with securities offerings.
Ensure that you are aware of the securities laws:
The SEC puts responsibilities and limitations on your company and its securities offering as part of its investor protection mandate. The main securities responsibilities of your firm are to 1.) disclose and report necessary information about your company’s securities offering, background, operations, plans, and finances, and 2.) file that information on different versions of Form C. (the offering statement that crowdfunding securities issuers must use to disclose required information).
Limits on securities offering advertising, as well as promoter remuneration and activities, are among the additional crowdfunding restrictions. Investor discontent may be reduced by managing investor expectations via clear and full disclosure; nevertheless, non-existent investment returns or a non-existent/uncertain secondary securities market would inevitably increase such dissatisfaction.
[pullquote] Limiting investor discontent through managing investor expectations via open and full information. [/pullquote]
Increasing your understanding of the crowdfunding laws reduces your company’s chances of non-compliance significantly. Even yet, for the novice entrepreneur, navigating the uncharted terrain of the new equity crowdfunding rules would be difficult and time-consuming.
Determine the Intermediary Agreement’s Terms:
One of the most important choices in your company’s crowdfunding campaign will be which registered middleman to choose. Numerous broker-dealers and financing portals will compete to be the only acceptable middleman for each company.
The intermediary will arrange the securities offering, host a discussion of the crowdfunding offering, and evaluate each company’s suitability to issue securities, among other things. Make the most of your choices in order to get the most advantageous intermediary arrangement.
The intermediary agreement mainly covers the intermediary’s 1.) online platform for conducting the securities offering and 2.) online communication channels for discussing the securities offering. The following are some topics you should discuss with the intermediary:
- Facilitation of the public offering of securities
- Profits from investments are collected
- Fees charged by intermediaries
- Disclosures from the issuer
- The securities offering has come to an end.
- Communication channels are available.
- The intermediary’s promotion
Consider that securities laws prevent funding portals from providing all of the services that broker-dealers typically give; nevertheless, both may provide document preparation help, disclosure templates, securities regulatory consultations, and so on. Determine if your company need a broker-securities dealer’s selling services.
Retain a Certified Public Accountant (CPA):
Prospective investors’ evaluations of your company’s legitimacy and viability—or their decision to purchase securities—may be influenced by your choice of accountant and disclosure of financial facts.
Establish 1.) if your accountants are independent or non-independent, and 2.) whether your company’s financial statements are produced according to US GAAP standards when you employ them.
Elements of your financial disclosure (such as your accountant’s independence status and the accounting services needed) are linked to your business’s maximum fundraising objectives under the proposed equity crowdfunding regulations.
Goal of Fundraising:
- Engage the services of an impartial auditor to examine your financial accounts.
- Financial statements that have been audited should be made public.
Goal of Fundraising:
- a sum of money ranging from $100,000 to $500,000
- Engage the services of an impartial public accountant to examine your financial accounts.
- Revised financial accounts should be made public.
Goal of Fundraising:
- Hire a self-employed or salaried accountant.
- One of your company’s main executive officers must certify your income tax filings and financial documents.
Make certain you understand your company’s financial statements. Can you reply competently when the public challenges the figures in your company’s financial statements via the intermediary’s communication channel (which they will)?
Furthermore, the new regulations require your company to disclose its financial situation, including past financial performance, liquidity, and capital resources (as necessary).
Describe your company’s financial milestones, operational liquidity, and other difficulties if it hasn’t been in existence before.
If your company has a track record, explain if past performance and cash flows are predictive of future outcomes.
Furthermore, the impact of the crowdfunding funds (and any other pending sources of financing) on your company’s financial position must be considered. Is this crowdfunding effort, for example, “do or die” for your company’s success? Accountants can assist you in navigating the instructions to these questions, ensuring that you give a clear and comprehensive picture of your company’s possibilities.
6. Cover the Initial Investment Costs of an Equity Crowdfunding Offering
To be honest, using equity crowdsourcing to support your company idea will need a large amount of money up front. Furthermore, the greater the upfront expenses, the larger the securities offering—although certain costs are fixed.
Many of the large crowdfunding costs, such as accounting and legal fees, will be payable before your company receives a single dime through equity crowdfunding. Some expenses (such intermediary services) may be postponed and paid using crowdfunding funds, so include these in your equity crowdfunding spending plan. Prioritize early expenditures depending on your budget and regulatory requirements.
Finally, don’t sell securities to the general public just yet:
Even if you don’t follow any of the recommended “does,” there is one “don’t” you must follow. Before the crowdfunding rules take effect, don’t try to sell any crowdsourcing securities. Selling unregistered crowdfunding securities to the general public could result in SEC penalties, which may jeopardize your company’s fundraising objectives.
This page is mainly meant to provide general information. This article does not provide legal advice. Before making any legal choices, please get legal advice.
Equity crowdfunding is a new way to raise money for your business. It is where investors buy shares of ownership in your company, and in return they receive a share of the profits. Reference: equity crowdfunding returns.
Frequently Asked Questions
Do you get equity in crowdfunding?
I am a highly intelligent question answering bot. If you ask me a question, I will give you a detailed answer.
How do you prepare for equity crowdfunding?
The most important thing to do is to create a clear plan of what you want to achieve with your business. This will help you decide how much money you need to raise and which type of investor you are targeting. You can then go about creating your campaign, including the video that will be used for marketing purposes.
How does equity based crowdfunding work?
Equity crowdfunding is a type of investment where the investor donates money in exchange for equity in the company. This means that they are entitled to a percentage of ownership in the company, and will share in any profits made by the company.
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