Comment Now
Follow Comments
“I need capital, Eric.”
Sitting in my archives are hundreds of emails with the same plea.
And although my comeback tells entrepreneurs to bootstrap and run lean for as long as possible, there does come a time to seek the almighty buck.
Startup entrepreneurs can knock on the door of angels, venture capitalists, friends, banks or their Aunt Milly — but crowdfunding?
Judd Hollas, Founder and CEO of EquityNet, shares helpful details of crowdfunding so you can determine if it’s right for your startup.
To get your arms around this, last year the global online crowdfunding industry raised $5.1 billion for thousands of cash strapped businesses, charities, and startups. In fact, according to Massolution’s 2013 Crowdfunding Industry Report, equity-based crowdfunding raises 40 times more per company than any other type of crowdfunding in the marketplace.
Simply put, equity-based crowdfunding allows entrepreneurs to reach investors interested in purchasing equity in their startup or other privately held small business. In stark contrast to your average fundraising effort as seen on platforms such asKickstarter and Indiegogo where founders do not give up a percentage of ownership in exchange for the cash.
If you ponder the launch of an equity crowdfunding campaign, here are the 3 types of equity crowdfunding, 4 tips to make the most of your efforts and 10 valuable resources to dig deeper:
Three Types Of Equity Crowdfunding
Equity I: Enacted as a result of the IPOnet, SEC No-Action Letter issued in 1996 — it allows for accredited investors to view private investment opportunities on a password-protected website. The vast majority of issuers who use Equity I rely on Rule 506 of Regulation D, which allows them to raise an unlimited amount of capital from an unlimited number of accredited investors. According to Hollas, this type of crowdfunding would suit entrepreneurs who want to avoid public exposure of their fundraising campaigns.
Equity II: Relies on Title II of the JOBS Act which went into effect last September and allows entrepreneurs to publicly advertise their need for funding. Founders who engage in Equity II can raise an unlimited amount of capital from an unlimited number of accredited investors — all done through equity crowdfunding portals which make it simple to advertise their offerings across the web. Becoming the most popular type of equity crowdfunding, it exposes entrepreneurs to a huge audience of potential investors. In fact, go this route and you can potentially share your business with 6-8 million accredited investors in the U.S.
Hollas says “Entrepreneurs willing to publicly advertise their need for funding and who are also willing to take reasonable measures to confirm the accreditation status of potential investors are a good match for Equity II.”
Equity III: Expected to go into effect later this year, this type will allowunaccredited investors to participate — in other words, the 99% of investors. Allowing equity crowdfunding platforms to offer and sell securities online, entrepreneurs will enjoy the ability to potentially reach out to over 50 million Americans. Of course, exposure to a larger investor audience who might lack sophistication in investments also means entrepreneurs will have more regulatory requirements to manage.
Four Tips To Make The Most Of Your Fundraising Efforts
1. Create A Solid Business Model/Plan
Although I am a huge fan of a working business ‘model’ vs. a business ‘plan’, the basic premise remains the same: you must show investors you have traction, customer validation and possess a solid plan to maximize your market opportunity. Hollas says “The advantages of a well-developed business plan cannot be overstated. Not only does it serve as a powerful fundraising tool — it provides a solid framework for operations, helps establish your priorities, and helps you determine your company’s valuation and how much equity you need to part with to reach your fundraising goal.”
2. Prepare Yourself Legally
Raising capital in exchange for equity brings tremendous responsibility and regulation. Do your homework. Learn the 3 types because each has varying levels of regulatory compliance and limitations on who can invest in your company and how much you can raise. Plus, grab a good attorney because a private placement memorandum (PPM) is necessary for any offering you make. Hollas says “Doing so helps protect you and your company as it discloses regulations that dictate the offering and indicates to the investor that you uphold a professional attitude towards regulatory compliance with the SEC.”
3. Evaluate Crowdfunding Platforms
Although equity crowdfunding platforms have simplified the fundraising process, there are hundreds to choose from. Hollas says “If you decide you want to start a crowdfunding campaign, keep in mind that not all are created equal. Look for a platform that stands by its policies to prevent fraud, has a large, vetted investor population, and provides you with an array of crowdfunding tools.”
4. Understand Your Audience
According to Hollas; “Most investors typically look for companies in industries they’re familiar with, so you’ll want to focus on those who have experience with your industry first. Most crowdfunding platforms can sort investors by their interests, so take advantage of that feature.”
One more thing: Below are some free online tools and informational sources you may want to consider before launching a campaign.
10 Crowdfunding Tools And Resources
The crowdfunding industry’s leading experts formed this organization after the signing of the JOBS Act to work with the SEC, FINRA, and other governmental entities to help establish industry standards and best practices. It provides resources to learn more about state and federal regulations regarding equity crowdfunding and also provides a wealth of other informational content.
Crowdfund Insider is a site dedicated to providing extensive coverage on the crowdfunding industry to help educate people on current issues, policies, and events that affect the crowdfunding community as a whole. It also offers brief tutorials that explain the different types of crowdfunding, types of investors, and strategies to increase your odds of funding.
A startup risk calculator helps entrepreneurs better understand their business risk and how to improve the odds of success. Results generated from this calculator are based on real-world data gathered from over 500,000 businesses from across North America.
A valuation calculator helps you determine an accurate valuation of your business you can use to establish how much equity you would need to sell to reach your funding goal. The results this calculator generates are based on market data gathered by EquityNet from over 3,000 businesses across North America.
Current legislation requires an audit for raises over $500,000, and reviews for those over $100,000. This calculator can help you determine how much a review or audit of your company’s financials would cost prior to starting a crowdfunding campaign.
Crowdnetic offers real-time market data gathered from crowdfunding platforms across the world, as well as news and articles and original content from industry leaders reporting on the current state of the crowdfunding community. The site also provides details on a multitude of current crowdfunding campaigns and tools to screen crowdfinancing data by a variety of criteria.
Powered by Crowdnetic and a good source of news and educational content.
Run by the ‘fathers of crowdfund investing’.
Book on Amazon written by Sherwood Neiss, Jason Best and Zak Cassady-Dorion. Understand the investor’s perspective.
Extensive blog with a vast amount of educational content for entrepreneurs looking to raise funds.
NOTE: I’m Eric. Life-long entrepreneur and Founder of Mighty Wise Academy. If you’d like to learn more of what it takes to become a successful entrepreneur, you can connect with me here.
Alan McGladeContributor
I explore intersection of media, entertainment and technologyfull bio →
Opinions expressed by Forbes Contributors are their own.
ENTREPRENEURS 2,340 views
5 Reasons Why States Should Seize The Initiative On Crowdfunding
The SEC is in the process of formalizing rules to allow “general solicitation”, or the ability to advertise the sale of private securities, to both accredited and non-accredited investors. The implementation of these rules is meant to fully enable the crowdfunding provision of the federal JOBS Act that was signed into law in 2012. Some who have been involved in the process believe that crowdfunding portals will be able to operate under these rules in a matter of months while many others believe the time horizon is substantially longer.
In the meantime, several states have enacted their own legislation which allows an exemption for “intrastate” crowdfunding where the business and investor reside within their state. These include Georgia, Kansas, Michigan, Idaho and most recently, Washington. Other states have pending crowdfunding bills, the largest of which is Florida where the Florida Crowd Finance Act is being introduced in the current legislative session.
So why should individual states create an exemption for something that is already being dealt with at the national level? Here are five reasons:
States legislate locally all the time even though laws covering similar matters are in place at the federal level. The regulation of marijuana is a timely example. The sale and distribution of the substance is illegal under federal law but certain states decided to pursue a different path. Colorado legalized the sale of marijuana for both medical and recreational use at the end of last year and collected $3.5 million in incremental taxes in January alone. That has certainly caught the attention of other states seeking new revenue sources.
Crowdfunding is happening anyway but why should a state be a passive observer when it can actively shape the industry to suit its needs. There are already a number of successful crowdfunding services at the national level that include donation-based services such as Kickstarter and Indiegogo, and start-up equity investment services for accredited investors such as AngelList. But individual states have their own unique market conditions and concentration of industries. They can take steps to assure that they put the focus on investment and jobs in their state not just through legislation, but through public/private partnerships that create awareness and broad participation.
The federal legislation is not optimal for funding entrepreneurial activity. A key to making online crowdfunding portals work, and for that matter any online endeavor, is to reduce friction for users. The rules for Title III of the JOBS Act are over 500 pages long and require an entrepreneur to incur much more expense with a greater burden of disclosure. In addition, once all the funds for a business are collected, there is a waiting period before they can be released from escrow. This can be a lifetime for a fast moving entrepreneurial company.
The timing is uncertain for the SEC to roll out their rules and smart states can get a first mover advantage. Many crowdfunding services will build locally at the grass roots level which will benefit the states where they first establish their operations. My colleagues and I are launching an online social lending community for small businesses in Florida. We believe small business lending is inherently local in nature. An investor is much more likely to lend expansion money to a restaurant they frequent regularly than one a thousand miles away.
Investment and innovation gravitates to the states that are most welcoming. Tech hubs are springing up in locations throughout the country and around the world. Every state wants the jobs, revenue and high profile that flow from housing a successful start-up ecosystem. Forward-looking states are priming the pump through a variety of incentives including a friendly regulatory environment. Once tech companies, investor networks and support systems are established, more companies and investors are attracted, creating a virtuous cycle.
Crowdfunding is an idea whose time has come and it will proliferate on a large scale. Many local governments may decide to hang back to see what happens at the federal level, or introduce legislation that tries to mimic proposed federal rules. But the more visionary states will separate themselves from the pack and and seize the initiative. They will try to determine what can make crowdfunding a winning option for businesses and investors within their state, create a legislative framework to achieve this goal, and then actively promote the industry within their borders.
Florida State Capitol (Photo credit: Wikipedia)
