The following is a guest post from Cliff Ennico, author of The Crowdfunding Handbook: Raise Money For Your Small Business or Start-Up with Equity Funding Portals (AMACOM May 2016).
On May 16, 2016, the SEC handed down regulations under the federal JOBS Act that allow small businesses and early stage companies to raise capital on the Internet via “crowdfunding portals,” such as Kickstarter, IndieGoGo and SeedInvest.
The regulations are over 600 pages long, but here are some key points:
- It’s Not Just for Tech Companies. Any small business can raise money under these rules, including retail, service and other “non-scalable” businesses that haven’t been able to tap into the securities markets until now.
- It’s Not Just for “Accredited Investors”. Anyone can buy securities in a crowdfunded offering, although there are limits on how much they can invest. If your company has a large following on social media, you can solicit them to view your offering (but see below).
- Some Companies Can’t Crowdfund. Foreign companies (other than Canada), hedge funds and other investment companies, public companies and companies that have run afoul of SEC rules in the past can’t take advantage of the new rules.
- You Gotta Use a Portal. You can’t crowdfund from your website or Facebook page. You must register with a broker-dealer or “crowdfunding portal” (registered as such with both the SEC and FINRA) and post your offering only there. Fees will run between 5% and 10% of the offering amount, with (maybe) flat fees for small offerings.
- You Gotta Do the Paperwork. You have to fill out a disclosure document using the SEC’s Form C (available as an “online questionnaire”) on the crowdfunding portal. You can attach “supplemental materials” such as marketing videos, product demonstrations and the like, but if you put these on the portal they can’t appear anywhere else (for example, on your website or Youtube.com) until the offering is completed.
- You Can Only Raise So Much. You can raise up to $1 million over a rolling 12-month period with crowdfunding.
- You Can’t Advertise Outside the Portal. You can post an “offering notice” on your website directing investors to the portal, and e-mail the “offering notice” to your social media crowd, but that’s it. You can’t communicate with investors directly, only through the portal.
- For Big Cash Raises, You May Need Audited Financials. If you are raising less than $100,000, your CEO can bless the financials. Over that, your financials must be “reviewed” by an independent CPA, but if you raise more than $500,000 in two (or more) separate offerings, the second offering must include audited financial statements.
- You Can “Double Dip”. If your crowdfunded offering is acceptable, you can go back for more (up to $1 million), but you will need updated business and financial information, and will probably have to pay a separate fee to the portal. You will also have to explain why you need the extra money.
- You Need to Manage Your “Crowd”. Consider carefully what it will mean to have dozens, if not hundreds, of investors to keep track of if your crowdfunded offering is successful. You will need to develop an “investor relations” strategy for keeping your crowd informed, up to date and satisfied with your company’s performance. It will be much tougher to “pivot” your business plan in a different direction with a crowd watching over your management team’s shoulders.
CLIFF ENNICO is a syndicated columnist and author of The Crowdfunding Handbook: Raise Money For Your Small Business or Start-Up with Equity Funding Portals (AMACOM May 2016). This article is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.