Equity Crowdfunding Upfront Costs : No Laughing Matter

Share

DYF Consulting | Diana Yazidjian | March 14, 2014

Calculating the cost of complianceAdoption of Equity Crowdfunding for ordinary investors may come sooner than we think. First in the US and not far behind, Quebec and Ontario. [Note: Saskatchewan has gone forward with a smaller-scale model as allowed by law  (150,000$ raises and under), but for the purpose of this post and considering investment statistics, we assume that companies will aim higher – much higher, and this has yet to be legalized]. We thought the time was well chosen to outline the costs a Canadian company may incur given the possible regulatory framework that will come into force.

I sat down with Paul Niederer, CEO of ASSOB, the largest equity crowdfunding platform, to compare notes. We may be more conservative than our Australian counterparts and demonstrate a lower tolerance to risk. That is why we are assuming that the bar will be set higher for Canadian companies. For a minimum investment of 500,000$ (USD), to prove their credentials, here’s what companies may be expected to pay upfront prior to launching an equity crowdfunding campaign:

COMPLIANCE FEES $3,000-8,000

1-Legal writing of offering document compliant with legislation:

2-Investment summary

BUSINESS/MARKETING SERVICE FEES $4,000-8,000

3-Value proposal, storytelling, business case, video

4-Community building, SEO, content strategy

PORTAL FEES $40,000 – 50,000

4-Due diligence on company and executive team $1,000

5-Offer document review: $3,000$-4,000 (Note: Crowdcube in the UK charges $3,000 or 1,800 pounds that are subsequently deducted from capital raise),

6-Portal success fee: 2-3% of min. proceeds

7-Broker success fee: 5-6% of min. proceeds (a broker is necessary for larger amounts)

Note: Australia's ASSOB charges 8% of which 2.5% goes to portal and 5.5% to broker.

PROFESSIONAL FEES $5,000$-7,000

8-Certified Public Accountant costs (higher for raises above $500,000)

9- Financial Planning

All in all, companies may be required to put in somewhere between 10 and 13% of the money raised. That’s 52,000$ to 75,000$ to raise $500,000. The SEC estimates are even more pessimistic, as indicated below.

Related: 

Add to that, ongoing fees: Marketing/Social Media/PR/Advertising which represent roughly 5-10% of the minimum proceeds, quarterly reporting costs and legal defense costs.

SEC low-high dollar estimates for crowdfunding raise and compliance

Credit: Crowfunding Capital Advisors - Venturebeat

Suffice it to say, under the proposed framework, this model is not a solution to all ills. Upfront costs are and will be a barrier to entry for early-stage start-ups.

Source:  DYF Consulting | Diana Yazidjian

 

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization’s profile and gain access to a dynamic group of industry front runners. Learn more About Us | Prezi or contact us at casano@ncfacanada.org.

Share

Leave a Reply

Your email address will not be published. Required fields are marked *