September 26th, 2018
An Entrepreneur’s Essential Guide to the New Wild West of Funding Opening on May 16 (United States)
The doors will open on Monday, May 16, to a new wild, wild West of crowdfunding for entrepreneurs.
Traditional crowdfunding is when an individual contributes money to a business or creative endeavor in exchange for a token gift, experience or recognition. Equity crowdfunding, meanwhile, is when entrepreneurs sell a piece of their companies in exchange for cash. Historically, entrepreneurs have only been able to raise money through equity crowdfunding from accredited investors, or those individuals who have sufficient levels of wealth and assets.
As of May 16, thanks to Title 3 of the Jumpstart Our Business Startups Act signed into law by President Barack Obama in 2012, entrepreneurs can raise money through equity crowdfunding from anybody who has the cash and the interest in investing.
Now, your family, friends and anyone with an interest can invest in your company -- not just angel investors and other wealthy individuals.
“Entrepreneurs will be able to raise money like they did generations ago, from their neighbors and communities that know them, not from some conglomerate risk-averse bank headquartered on Wall Street," says Nick Tommarello, the co-founder and CEO of equity crowdfunding platform Wefunder, in an email with Entrepreneur. "We expect that this is that start of a renaissance of entrepreneurship in the United States.”
That means entrepreneurs have a much wider pool of investors to raise money from.
Opening up equity crowdfunding beyond accredited investors “is the greatest advancement for entrepreneurship in a generation. The single most powerful barrier to bringing great innovations and companies to life is the ability to raise capital," says Ron Miller, the CEO of equity crowdfunding platform StartEngine, in an email with Entrepreneur. "Entrepreneurs now have the opportunity to engage their customer fans as investors, who in turn become brand ambassadors.”
Gaining access to new pools of capital is one reason for entrepreneurs to be encouraged, but the new equity crowdfunding rules also have regulations attached to them and potential limitations. Entrepreneurs who are going to attempt to raise money with equity crowdfunding need to know what they are getting into before diving into an equity crowdfunding campaign.
Here’s your hotlist of need-to-know details.
1. The amount you are allowed to raise on a crowdfunding platform is capped at $1 million in any 12-month period.
While that will be plenty of money for some small businesses, it’s definitely not enough to be a complete funding round for some entrepreneurs.
“Nowadays, startups on average raise, at a seed stage, in the neighborhood of $2 million. The fact that startups will have a limit of $1 million per year will either force them to be under capitalized or conduct another type of offering in parallel to doing a Title 3 to raise the remaining capital from accredited investors, which means more costs from a legal perspective,” says Alejandro Cremades, the co-founder of 1000 Angels, a digital platform where accredited investors can invest in startups that venture capitalists are also investing in.
2. Before selecting an equity crowdfunding platform, ask the portal what kind of support it offers.
There will undoubtedly be a flurry of equity crowdfunding platforms bubbling to the surface in the weeks and months following the May 16 start date. Entrepreneurs need to keep in mind not only what the crowdfunding platform will offer during the course of the campaign, but also after the fundraising period closes.
Related: Starting May 16, Entrepreneurs Can Raise Money in a Whole New Way. Here's What You Need to Know.
“Choosing a platform is a very critical component of an equity crowdfunding investor’s journey,” says Jonathan Medved, the CEO of equity crowdfunding platform OurCrowd. “How is your platform set up to manage the investment in a startup post funding? Will they sit on a board? Will they provide you with investment reports and how will they provide added value to the companies they invest in? Startup companies need assistance not only to raise funding, but also require help in countless areas such as business development and raising additional funds.”
3. Don’t take money from more than 480 unprofessional investors.
As the law is currently written, a small business with more than 500 unprofessional investors and more than $25 million in assets will be subject to the same regulations as a public company, which is potentially a serious burden for a small-business owner.
“Thankfully, Congress is debating the Fix Crowdfund Act to take care of this issue, but in the meantime, we don't recommend that even a small business accept more than 480 shareholders, unless they have the right to repurchase those securities if they hit the $25 million asset number,” says Tommarello.
4. Marketing is mission critical in an equity crowdfunding raise.
Launching your campaign is only the first step. Startups are going to need to have a plan to get the word out, just as with more traditional crowdfunding campaigns.
“Entrepreneurs will be faced with the challenge of standing out and being found by potential investors. Many will quickly learn that ‘Build it and they will come’ only works in the movies. Marketing an offering is rarely cheap and never easy,” says Howard Orloff, the co-founder of the Illinois-based investment platform VestLo.
5. Be careful what you say on social media about your crowdfunding campaign.
Entrepreneurs are allowed to share the name of the business they are raising money for, type of business, location, contact information for interested investors, the platform on which they are raising funds and a general description of the business. They can not, however, get into a pitch about why investors ought to invest.
“Entrepreneurs need to understand that they cannot discuss the specifics of their crowdfunding campaign through social media. Most don’t understand this distinction. While all other forms of crowdfunding piggyback on social media -- this one does not,” says Richard Swart, the chief strategy officer of the equity crowdfunding education resource NextGen Crowdfunding. “They are specifically forbidden from hyping or promoting any detail of the offering aside from communication to investor on the intermediary platform.”
The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 1300+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at ncfacanada.org.