Equity Crowdfunding Upfront Costs : No Laughing Matter

DYF Consulting | Diana Yazidjian | March 14, 2014

Calculating the cost of compliance - Equity Crowdfunding Upfront Costs : No Laughing MatterAdoption 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 compliance1 - Equity Crowdfunding Upfront Costs : No Laughing Matter

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

 

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