What regulation crowdfunding in the JOBS Act means to entrepreneurs and startups

What regulation crowdfunding in the JOBS Act means to entrepreneurs and startups

The JOBS Act was signed into law by President Obama in 2012, allowing companies to acquire funding through online portals from non-accredited investors, which roughly accounts for 97 percent of the population in the United States. On May 16, 2016, Title III of the JOBS Act, also known as regulation crowdfunding, or equity crowdfunding, was the last section to be implemented by the SEC.

With such a large pool of potential investors looking to enter the market, it would seem that the crowdfunding and investment communities would be extremely welcoming of Title III — but it seems like the exact opposite is happening. This could be because not enough is understood about this type of crowdfunding. As a founder who has tried all types of crowdfunding, I’ve seen significant benefits to all platforms, including equity crowdfunding.

How is equity crowdfunding similar to or different from other crowdfunding?

Equity crowdfunding shares similarities with Kickstarter campaigns in terms of how a company must spread their message to potential investors about their products in order to successfully raise enough funding. However, the main difference between equity crowdfunding, rewards-based crowdfunding and donation-based crowdfunding is the investor’s end goal in rewards-based crowdfunding, such as Kickstarter and Indiegogo. Rewards-based fundraising is aimed at enticing investors based on the benefits they would receive in relation to the amount they contribute.

As a founder, I’ve used this type of crowdfunding, and have helped others do so with great results. It’s been ideal for taking a prototype to the next level because those investing are excited about the concept they see and are incentivized to invest because they will most likely be one of the first to receive the new product. I’ve experienced wildly successful rewards-based crowdfunding; it’s been the reason our company could move to the next level in our development.

Donation-based crowdfunding seeks funding that comes as goodwill from the community. This method is geared toward charitable contributions rather than capital acquisition, which is the aim of equity crowdfunding. When investing through equity crowdfunding, an investor receives shares in the company instead of a final product, which tends to yield a greater benefit for the investor long-term. The way the shares are structured allows the founders to retain control of their company even after selling a portion of their equity to multiple investors across the country.

Of benefit or concern?

While equity crowdfunding was developed with the intention of providing significant benefits, many have professed some major concerns related to how equity crowdfunding might change the funding landscape. The major concerns include the numerous intimidating filing requirements that entrepreneurs must fill out for the SEC, the need for constant reporting to the SEC, the requirement that company financials be made available to investors and the review or audit of financials by an accountant based on how much you have raised.

However, others believe these requirements are justified. Manny Fernandez, CEO and co-founder of Dreamfunded and the 2014 Equity Crowdfunding Leadership Award recipient, notes, “When a company is just starting, transparency in terms of financials is irrelevant because there is nothing to hide from potential investors. This is one of the various ways in which established investors are trying to maintain control of entrepreneurs and prevent them from finding alternate funding opportunities apart from the traditional methods. It makes good business sense to all involved.”

Do your research, understand what is involved in terms of benefits and risks and determine how you could use the funds wisely.

Another concern has been the liability companies might face when an investment venture, failing to generate any returns or growth, shuts down. A decision such as this made by founders may motivate some jilted investors to seek compensation for their lost investment. However, when an entrepreneur fills out a Form C, full disclosure is made to potential investors about the risks, which are associated with investing in the company.

It is highly unlikely that any disgruntled investor would be able to win any lawsuit seeking reparations as long as general risks involved in their investment are disclosed to potential investors. Also, investment limitations based on income level have been established by FINRA and the SEC to help investors not risk their entire pension or life savings by making one bad investment.

Another issue has been the fact that because there tend to be smaller investment amounts with equity crowdfunding, the cost of using this type of crowdfunding platform might outweigh the benefits of it, as smaller individual investment amounts may raise the amount of investors on the cap table. In addition, the fee charged by funding portals reduces the total amount raised. However, although the amount per investor is smaller, there is also a larger amount of people who are helping you watch the business grow.

For me, as an entrepreneur, I’ve spent a considerable amount of time and money looking for potential investors for my digital wallet startup who are not always readily available, in the local area or willing to invest in the idea that they are pitched. Instead, with equity crowdfunding, I pay a fee and then get access to more investors, which has saved me considerable time, money and effort, as well as enables me to get started on building out my company sooner.

One of the greatest benefits with equity crowdfunding is that I can set my own terms for the shares of the company, providing me with more autonomy and freedom. The shares sold through equity crowdfunding are limited to only one class of securities, so there are no voting rights. Instead, the investor is simply investing in the company’s profitability and success. This process has helped me maintain control and minimize any potential threat of investors commanding the direction of the company during the early stage of fundraising.

Some entrepreneurs have expressed their dislike of the fact that there is a fundraising limit of a million dollars over a 12-month period. However, it’s important to remember that this type of funding is typically only for the first round, and it can be used again for future stages of growth or other types of funding can be implemented at that point. Also, some of my companies started on much less funding and I was able to leverage more funding through equity crowdfunding at a later stage when I really needed a larger amount.

Proposed changes to Equity Crowdfunding Act

In March of this year, before Title III was implemented, the Fix Crowdfunding Act bill was introduced into Congress to address and improve upon some of the shortcomings of the current legislation. The first proposal is to increase the annual fundraising limit from $1 million to $5 million, which allows entrepreneurs who require larger amounts of capital in the seed round to use equity crowdfunding as a potential source of funding.
The second proposal is the “test the waters” provision, which allows entrepreneurs to gauge the interest of potential investors through an online portal before they take the time, effort and money to extend an initial offering. The third proposal is to allow for the use of SPVs (special purpose vehicles), which would help entrepreneurs keep their cap tables organized because the investors of low-dollar amounts are grouped together into one large fund that appears on the cap table as one large entity. These proposed fixes are now up to the Senate to decide, and it will take at least a year for it to be passed.

A guide to using equity crowdfunding

In the meantime, I highly recommend considering equity crowdfunding, as it has offered an additional avenue for funding without having to contend with investors who want to take over and run my business.

As an entrepreneur, I know that risk is just part of the game. If I always played it safe, I wouldn’t be here today, with a rapidly growing online invoicing and payments business. The risk involved with equity crowdfunding is minimal. What I always recommend before using any kind of funding vehicle is to do your research, understand what is involved in terms of benefits and risks and determine how you could use the funds wisely at a certain stage in your startup’s development.

Today’s equity crowdfunding marketplace also has credible platforms that are driving greater success for those using this funding source and connecting more entrepreneurs quickly to the investors they need to become successful.

What regulation crowdfunding in the JOBS Act means to entrepreneurs and startups

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Crowdfunding: Do’s and Don’ts for New Business Owners

Crowdfunding: Do's and Don'ts for New Business Owners

Crowdfunding: Do’s and Don’ts for New Business Owners

Under new SEC rules, crowdfunding continues to be a complex financing vehicle that buyers should evaluate carefully before committing.

Over the past several years, there’s been a lot of talk about crowdfunding as a financing mechanism for entrepreneurs interested in acquiring or expanding their businesses. Recently, the SEC enacted new rules that allow entrepreneurs to raise up to $1 million through crowdfunding.

That’s good news for business buyers, right? Maybe … and maybe not.

Under the new SEC rules, crowdfunding continues to be a complex financing vehicle with pros and cons for small business owners. If you’re seriously considering crowdfunding your business, you’ll need to tread carefully and know what you’re getting into before you commit.

The SEC’s New Crowdfunding Rules for Small Businesses

In October 2015, the SEC established new rules for crowdfunding a small business. Known as Title III, these rules created a framework for entrepreneurs to offer equity to non-accredited investors.

Key elements of Title III rules include:

  • Funding Cap: Unlike other forms of financing and investment, entrepreneurs cannot use crowdfunding to raise an unlimited amount of capital. Under the new rules, small businesses are allowed to raise no more than $1 million in a 12-month period through crowdfunding.
  • Transaction Procedures: Crowdfunding transactions must be executed through accredited third parties such as broker-dealers or approved funding portals that are accountable to the SEC.
  • Investor Limits: Individual investors who earn less than $100k per year can invest $2,000 or up to 5 percent of their annual income. Those who earn more than $100k can invest up to 10 percent of their income, with a maximum investment of $10k during a 12-month period.
  • Reporting Requirements: Small businesses that engage in crowdfunding are subject to additional disclosure, reporting and audit requirements.

The SEC’s Title III rules went into effect in May, clearing the way for business owners to begin using crowdfunding as a tool to grow their companies. For business buyers, that means crowdfunding is now an option for expanding or improving a business acquisition.

The Do’s and Don’ts of Crowdfunding

Although the SEC’s Title III rules allow business buyers to tap into crowdfunding as a source of capital for business growth, crowdfunding is not an advisable funding vehicle for all business owners.

If you’re testing the waters and leaning toward launching a crowdfunding initiative, there are several proactive steps that you will need to take as you move forward.

DO explore all of your options.

A lack of financing opportunities helped propel crowdfunding into the spotlight. But most business owners have more financing options available to them now than they did during the lending crisis. Before you commit to crowdfunding, explore commercial financing, SBA loans and other funding options.

DO find the right platform.

Equity crowdfunding is much different than rewards-based crowdfunding, an arrangement in which the business offers investors a tangible reward rather than a piece of the business. To comply with SEC rules and to protect the integrity of your investment vehicle, it’s important to identify a reputable platform that can attract the right kinds of investors and provide a registered funding portal for transactions

DO consult an attorney.

Even though the amounts individuals invest can be relatively small, equity crowdfunding is a serious funding vehicle – and it can have serious consequences for business owners who fail to adequately protect themselves. Before you launch a crowdfunding initiative, consult an attorney to make sure you’re in compliance with Title III and that your business structure will protect you from personal liability should the arrangement go south. In some cases, Title III requires owners to publicly file annual financial statements that have been reviewed by an independent accountant or audited.

In addition to proactively structuring your crowdsourcing opportunity to attract investors and mitigate risks, there are several things you’ll want to avoid before and after you launch your initiative.

DON’T neglect the costs.

It’s a myth that crowdfunding is more cost-efficient than other types of funding. Funding portals and broker-dealers charge fees for their services, and the cost of complying with SEC regulations add up. Fees vary in structure. For example, NextSeed Inc. charges between 5 percent and 10 percent of the amount raised, while SeedInvest LLC will charge a fee that is 5 percent of the amount raised and then also take a 5 percent equity stake. More importantly, equity crowdfunding requires you to give investors a piece of your business – a cost that you won’t incur with traditional debt financing.

DON’T make unrealistic promises.

It’s tempting to promise the moon to attract a high volume of investors. But overpromising often leads to a mass exodus of investors and causes lasting damage to your business. When promoting your business to potential investors, it’s okay to be positive, but be realistic about what they can expect in terms of timelines and yields.

DON’T ignore SEC requirements.

Title III rules aren’t guidelines or suggestions. They are legally enforceable regulations that the SEC has enacted to protect investors from fraudulent investment activities. Educate yourself about Title III rules and comply with all SEC regulations to avoid fines and other penalties.

Title III crowdfunding is still in its infancy. Finding sources of capital to grow or expand recent acquisitions will always be a concern for business buyers and new business owners and ultimately, crowdfunding may prove to be a viable funding channel for small operations.

Until then, entrepreneurs and business buyers should be cautious. Include equity crowdfunding in the mix of potential funding sources, but do your homework and carefully consider whether the amount you can reasonably expect to raise through crowdfunding will be worth the cost.

Crowdfunding: Do’s and Don’ts for New Business Owners

When crowdfunding met winemaking: The story of Naked Wines

When crowdfunding met winemaking: The story of Naked Wines 1

When crowdfunding met winemaking: The story of Naked Wines

If you’re a big fan of wine but still want to run a startup, there may not be that much innovation you can get away with on the product side. Wine, when all is said and done, is still wine. That doesn’t mean you can’t turn the industry inside out by turning the traditional winery business model on its head — and that’s exactly what Naked Wines did. I decided to have a closer look at how a 10-year-old company can upend one of the oldest industries in the world.

What do you get when you mash together half a stalk of grapes, a handful of angel investment principles, a sprinkling of crowdfunding and a well-oiled marketing machine? You end up with Naked Wines, a young winemaking company that’s shaking up the world of wine. For its angels, it’s offering up one of the tastiest “exits” imaginable: Wine.

Step into my officeStep into my office

Turning money into wine

When I started digging into Naked Wines, it struck me how similar the company’s role is to publishing, from a winemaker’s perspective. A winemaker pitches an idea for a wine at the company. If its in-house winemakers like the idea, they pay the winemakers a stipend, not dissimilar to an advance on a book deal. Naked Wines then fronts the winemaker money to buy (or grow) grapes, along with access to winemaking and bottling facilities. And once the wine is ready, Naked Wines takes care of the marketing and distribution of the wines.

You can imagine a Shark Tank kind of situation, except with wine drinking. It’s great fun.

— Anne Saunders, U.S. president of Naked Wines

“For the winemakers, we help de-risk their lives,” Naked Wines’ U.S. president Anne Saunders tells me. She points out that, much like carrots and potatoes, wine is an agricultural product. Unlike root vegetables, where you see a result after a few weeks, for a wine, it can take years to determine whether or not an experiment was a success. “By working with us, winemakers don’t have to worry about whether or not the wine is sold. We buy the full production of wine, so they can just focus on the art of making wine.”

Makes sense, but making wine isn’t cheap. So where does the money come from? That’s the other big innovation on the business model. Naked Wines sells a recurring wine club membership to its members, whom it calls “Angels.” By paying $40 per month, a customer unlocks the doors to the Naked Wines cellars. The money contributed on a monthly basis accrues as “wine credits” over time and can be exchanged for wine at a steeply discounted price.

The sun sets over the vinyard, after another long day of turning air and mud into delicious grapes. Well done, sun. Thank you. The sun sets over the vineyard, after another long day of turning air and mud into delicious grapes. Well done, sun. Thank you.

Encouraging the weird and the experimental

Red wine, you say? Made in California? Doesn't sound all that innovative to me... 

California Red? Oh, sure, if you insist. <clink>

 

 

 

 

 

If you’ve bought a bottle of wine from a supermarket, liquor store or wine merchant in the U.S., there’s an excellent chance that you’ve bought a bottle created by one of only a handful of wine super-producers.

“A challenge in the wine industry is that it consists of a small number of large conglomerates,” Saunders says, referring to the likes of GalloConstellation and Treasury. For winemakers, the conglomerates are a great way of getting access to the resources to make wine, but many of the large producers are hesitant to try something new and exciting.

New and exciting is the rallying cry for a lot of what’s going on with Naked Wines. Instead of relying on benefactors, external investors or huge faceless wine conglomerates, the company is enabling winemakers to make the wines they want. Even more rare is the opportunity for the winemakers to speak directly with the consumer — and vice versa. In fact, winemakers respond to the majority of reviews left by customers on the site.

The thing that makes Naked Wines really work, then, is that the company is able to attract talented, independent winemakers who want to experiment with new ideas, connecting them directly to its end consumers.

The vast majority of these bottles come from a very small number of companies. Boo, Big Grape! The vast majority of these bottles come from a very small number of companies. Boo, Big Grape!

From crazy idea to affordable bottle

“All of our wines start with an idea,” Saunders explains as she gets incredibly excited about some of the concepts the company has backed in the past. “Our chief winemaker is a distinguished winemaker. He heads up a staff of six that runs the winery. Between them, they decide which winemakers and which wines to take a chance on. You can imagine a Shark Tank kind of situation, except with wine drinking. It’s great fun.”

“We had one winemaker who wanted to source Cabernet grapes from all around the world and create a global Cabernet blend. Another wanted to create a two-hemisphere Malbec with grapes from California and Argentina. We have a self-taught winemaker who fell in love with the Vermentino grape variety. He thinks it would grow well here in California, so we’re working with him to plant them here, creating a completely new California Vermentino.”

Ana Diogo-Draper's day job is at a prestigious winery. On the side, she makes more experimental wines for Naked Wines 

Ana Diogo-Draper’s day job is at a prestigious winery. On the side, she makes more experimental wines for Naked Wines.

 

 

 

 

Most impressively, the company is able to keep the wines affordable. The highest-ranked wine on the site, for example, has more than 15,000 reviews; 94 percent of the people who bought it would buy it again. To Angels, the price tag is $17. The vast majority of wines cost between $9 and $30.

“One of our winemakers, Ana Diogo-Draper, is the chief winemaker at Artesa,” Saunders explains, trying to solidify what’s in it for the winemakers. While Diogo-Draper might be the brains behind the wines from a prestigious winery, her name isn’t on the wines themselves. To take a leap into more playful, experimental wines, she turned to Naked Wines in order to have the artistic freedom to make wines to her own vision.

Winemaking is part agriculture, part experience and part magic. Probably. Winemaking is part agriculture, part experience and part magic. Probably.

Powered by the interwebs

Originally founded by Rowan Gormley in the U.K. in 2008, the idea was to bring the then-novel concept of crowdfunding to the world of winemaking.

Naked Wines founder Rowan Gormley. Naked Wines founder Rowan Gormley.

“The business model is completely enabled by the internet,” says Saunders. “We see ourselves as a crowdfunding site of sorts; in fact, that’s where the original idea came from. The founders had been in the wine industry and wanted the independent winemakers to be independent. The solution they chose was crowdfunding.”

Naked Wine's "Fine Wine Bond" raised the company a nice chunk of operating capital, without having to sell equity in the business.
                                                                             
                                                                                                                                 

 

 

Naked Wine’s “Fine Wine Bond” raised the company a nice chunk of operating capital, without having to sell equity in the business.

 

 

 

By billing its more than 90,000 U.S. Angels a minimum of $40 each on a monthly basis, the company can enjoy a healthy cash flow situation. While it is hesitant to share its exact revenues, even assuming that everyone is paying in the minimum amount, we are talking about a business with an annual recurring revenue of well over $43 million — and that is just its relatively new U.S. business. Across Australia and Europe, the company has a large number of additional Angels.

The company has shown innovation in other aspects of finance, too. In 2013, Naked Wines took a loan from its customers in the form of a Wine Bond, offering 7 percent interest to people fronting the company money, or 10 percent to those who instead opted to be repaid in Wine Credits — account credit in their Naked Wines accounts. The campaign was tremendously clever, both in terms of its result (it raised £5 million/$6.5 million in less than a month) and in business terms, raising a large sum of money from the crowd without having to offer equity in the company in return.

Say what you will about farming, but I'll be damned if the winemakers' view isn't a hell of a lot better than mine. Say what you will about farming, but I’ll be damned if the winemakers’ view isn’t a hell of a lot better than mine.

Tracking every bottle from vineyard to customer

The other place where Naked Wines is innovating is on the distribution side of things.

“An interesting thing happened when prohibition ended,” muses Saunders, suggesting that the seeds of the current state of alcohol distribution were sown in the early 1930s. Very soon after the 18th amendment was repealed, a complicated distribution network was established. Part of the result of this is that with very few exceptions, winemakers cannot sell their wines directly to the public. “It is a very deep-seated distribution network, which is often a problem for alcohol producers. For us, it’s actually a competitive advantage: Because we built our own network, our winemakers’ wines are available in a lot more places than what a small winemaker can typically expect.”

Doing your own alcohol distribution is more disruptive than you would imagine; the distribution market is intensely fragmented, with a large number of small distributors covering relatively small geographic areas. The matter isn’t made any easier by the fact that state laws differ wildly from state to state.

Om. And, indeed, nom. Om. And, indeed, nom.

“We ship to 43 different states,” says Saunders, admitting that distributing across the U.S. is challenging on a number of levels. “Every state has slightly different rules. We can only ship a certain number of bottles to Minnesota addresses, for example. For other states, like Pennsylvania, we can only ship to a licensed liquor store. And for some states, such as Utah, we can’t ship anything at all.”

If that sounds complicated, try to imagine the full depths of the logistics of the operation. Because state tax laws vary for alcohol — and in some states, the taxes are different based on the percentage of alcohol — never mind tracking cases of wine. The company had to develop a whole software backend to track the alcoholic grape juice flowing throughout the company’s logistics network. For tax and legal compliance purposes, each individual bottle is tracked from the winery, via the company’s three distribution centers in California, Florida and Ohio, to the consumer.

Aw. I wonder what these poor bottles did to end up in wine prison. I hope they are able to spring for bail soon. Aw. I wonder what these poor bottles did to end up in wine prison. I hope they are able to spring for bail soon.

Deepening the competitive moat

Grow, little grapes! Grow! Grow, little grapes! Grow!

If that sounds like a nightmare to set up, you’re definitely onto something, but on the flip side, it does give Naked Wines a fantastic moat to ward off competitors. The company is doing a similar thing with the vast amount of data it is collecting.

“The really interesting thing starts happening when people rate their wines,” says Saunders, revealing that the company’s more than six million wine reviews is enough data to do Netflix-esque “if you liked X you should try Y” recommendations for wine.

“What it all comes down to is that we are all about enabling winemakers to work on their passion projects. For the winemaker, we are able to help finance their dream wines becoming a reality. And for the customer, we offer the opportunity to be part of a whole series of new wines,” says Saunders. To that end, she explains that naming the subscribers “Angels” was anything but a coincidence.

“We know that wine lovers are attracted to this business model. It’s people who want to know where their food and wine comes from. I suppose,” Saunders concludes, “they are also angels in the sense that they help dreams come true.”

That's all good, David, but now that you mention it, I will take a top-up, please. You’re welcome, David. But now that you mention it, I will take a top-up, please. <hic>

When crowdfunding met winemaking: The story of Naked Wines

What the New Equity Crowdfunding Rules Mean for Entrepreneurs

Equity Crowdfunding

entrepreneur

What the New Equity Crowdfunding Rules Mean for Entrepreneurs

The SEC has finally released rules for Title III of the JOBS Act, the equity crowdfunding law. Nearly three years and seven months after the potentially game-changing bill was first signed into law, equity crowdfunding will be available to startups and small companies in 180 days. Yes, we get to wait another half a year before anyone can actually use equity crowdfunding, but at least now we know it will happen.

For those who have run out of Ambien, the hundreds of pages of new rules will provide a welcome sleep aid. But for professionals who plan to use these rules to help companies raise new capital, it is required reading. Bring on the Red Bull.

What does this mean for entrepreneurs? Will startups be able to actually use this law? Let’s take a look at what the new SEC rules say about key provisions, to answer those questions:

1. The JOBS Act says a company can raise up to $1,000,000 with Title III equity crowdfunding. Did the SEC expand this?
Despite the hopes of many of us that the SEC would pull a regulatory rabbit out of a hat and raise the ceiling to $5 million, the limit on what a company can raise through Title III equity crowdfunding remains at $1 million. If a company wants to raise more, there is always equity crowdfunding’s prettier cousin, a Regulation A+ mini-IPO to consider.

2. What can members of the “crowd” invest?
The law limits investors to (a) the greater of $2,000 or 5 percent of the lesser of their annual income or net worth, if either the annual income or the net worth of the investor is less than $100,000 and (b) 10 percent of the lesser of their annual income or net worth, if both the annual income and net worth of the investor is equal to or more than $100,000.

In both cases, Investors may not invest more than an aggregate amount of $100,000 in one year. The SEC actually tightened up the amounts that can be invested by each individual, which is not good news for entrepreneurs.

3. What happens if a company does not raise its goal amount?
Like many rewards-based crowdfunding campaigns and Regulation A+ mini-IPOs, if a company using the new equity crowdfunding law does not raise the full amount of their funding goal, they do not get to keep any of the money raised, and they lose the out-of-pocket up-front costs. This important provision means setting a realistic goal will become an important part of the equity crowdfunding process for entrepreneurs.

4. Can companies afford to use Title III equity crowdfunding?
The biggest news from the new SEC rules is that the proposed requirement of a full financial audit has been dropped by the SEC for companies using the equity crowdfunding law for the first time. Requiring a startup to spend tens of thousands of dollars on an audit made no sense. The SEC removed that burden, and now a company using the law for the first time must only have reviewed financials to raise more than $100,000, and lesser financial disclosures when raising less than $100,000.

There are still substantial costs, however. Legal fees, compliance costs, funding portal fees, broker-dealer fees and marketing expenses can add up. Without entrepreneurial minded attorneys offering affordable services and innovative businesses offering compliance services for a reasonable cost, equity crowdfunding would still be out of reach for most young companies. Luckily for startups and small businesses, both of the above exist, and will make this law affordable to use for most entrepreneurs.

5. What information has to be disclosed?
A company has to disclose to investors, and file with the SEC, the price of the securities, the method for determining the price, the target offering amount, the deadline to reach the target and whether the company will accept investments in excess of the target.

Companies also must provide a discussion of the company’s financial condition, a description of the business and the use of proceeds from the offering, information about officers and directors and owners of 20 percent or more of the company and annual financial statements.

6. What liability will a company and its officers have under equity crowdfunding?
Equity crowdfunding involves the sale of securities, and not just pre-selling a gadget like on Kickstarter. There are federal and state laws that govern the sale of securities, and if you do something wrong, your company (and its officers and directors) can be sued, and in some cases, could go to jail.

The bottom line is simple: Tell the truth. Under most securities laws including the equity crowdfunding law, being 100 percent truthful and not making misrepresentations of any kind are the keys to not having to bang out license plates in the prison yard with Bernie Madoff.

7. Are the shares sold through equity-crowdfunding liquid?
No. Much like most shares sold through private placements, the shares of stock sold in equity crowdfunding cannot be sold (in most circumstances) for at least one year. There is no marketplace or exchange for these shares, and in all likelihood, never will be unless a company registers with the SEC and becomes a public company.

Will equity crowdfunding work under the new SEC rules? Some may disagree, but I believe there is a workable model here that startups will be able to use to raise capital.

Like every new law, how usable it will be depends on a number of factors. But the reality is that an opportunity like this for startups to raise capital has never existed before, and rather than criticize the law’s shortcomings, some of us will work within the laws and rules to find ways to help companies raise funds online in a way they never could before.

clever

What the New Equity Crowdfunding Rules Mean for Entrepreneurs

The SEC’s new 685-page crowdfunding rules: What you need to know

In what can be considered a historic day for startups, small businesses and entrepreneurs all across the United States, the Securities and Exchange Committee (SEC) voted 3 to 1 to approve the final rules for debt and equity crowdfunding (aka Regulation Crowdfunding) on Friday. In about 180 days, tech startups and Main Street businesses will be able to raise up to $1 million from their friends, followers, and community via SEC registered websites. There is a lot you need to know about the new rules, so let’s jump right in:

1. This is NOT Kickstarter
If you are interested in selling equity in your startup or borrowing money from the customers of your small business, you must realize you are selling securities in your business and that this is a highly regulated activity (hence the 685 pages of rules). Take extra time to understand what you CANNOT do so that you do not get in trouble with the law.

2. What has changed?
Limitations under old regulations qualified you to issue securities without doing a full IPO as long as you limited the number of investors, used only accredited investors (those with income over $200,000/year or with a net worth over $1 million), and did not use any public means of solicitation (which included the Internet, email, newspapers, radio, television, etc). Those limits have all changed. Now, anyone can invest at least $2,000, but beyond that amount, an investor is still restricted based on income or net worth. (I’ve put together a calculator you can download to check your limits as an investor under the new rules.) Issuers (aka startups and Main Street businesses) can use email, Facebook, Twitter, etc., to offer an investment (debt or equity) in their firm as long as they hit 100 percent of their funding target, not exceed $1 million and do so on a SEC-registered funding portal (cheaper) or via a broker/dealer (more expensive).

3. Compliance is KEY
If you fail to comply with the rules (like submitting your annual report with the SEC within 120 days after the end of your fiscal year and posting a link on your website), you could lose your exemption, which means that you will face hefty fines and legal fees to defend yourself. Be sure to follow all the rules/filings before, during, and after you raise your funds. For instance, you cannot list your offering on more than one platform. Also if you want to host a launch party to promote your offering, do NOT do so with the funding portal (unless it is a broker-dealer) because that is considered offering investment advice (by the funding portal), which is not allowed.

4. Think of who is in your crowd when deciding on a path forward
If you have both accredited and unaccredited investors but wish (or need) to raise over $1 million, then consider doing what is called a parallel offering. Do a Regulation Crowdfunding offering for the unaccredited investors and at the same time a Title II offering, which allows for general solicitation of accredited investors and does not have the $1 million cap. Just be careful not to reference both offerings in your marketing materials or they could be considered “integrated.” They should be independent offerings.

5. You cannot crowdfund a fund to invest in crowdfunded opportunities
Each offering must include a business plan for which the underlying purpose must be a bonafide business and not an investment vehicle. Sorry, you creative types.

6. Your investors can change their mind up to 48 hours prior to closing
Keep in mind that if you hit your funding target, investors have the right to rescind. In this case, it might benefit you to aim to over exceed your target (which is allowed) so that you have enough cushion if an investor or two changes their mind. On the flip side, if you are exceedingly successful with your campaign before the 30-, 60-, or 90-day period ends, you may choose to close early with a five-day notice to potential investors (and the SEC) and start putting that money to work right away.

7. Disclose, disclose, DISCLOSE
One of the key provisions about the rules is that you need to be as upfront and transparent with your investors as possible. This requires that you disclose anything about your business that would have a material impact on an investor’s decision to back it. Disclosures could include everything from the fact that you’ve taken on substantial debt to the fact that your mother-in-law owns 70 percent of the business or that your business could fail if coconut water (your business model) goes out of vogue or that one customer makes up 80 percent of your business. If you think you would be overwhelmed by this, consider using http://idisclose.com/ which can help make sure you get it all out there.

8. Get comfortable with your financials
While the costly audit requirement has been removed for first time crowdfund issuers (you will still need them reviewed by someone like an independent public accountant if you are raising over $100,000), this doesn’t excuse you from having to produce financial statements that truly represent the financial health of your company. Don’t go down the path of crowdfunding if you aren’t going to use a product like Quickbooks. Using a product like Quickbooks means that your balance sheet, income statement, statement of cash flow, and statement of change in owner’s equity are just a report click away. Leverage technology to help you stay in line.

9. Your personal financial info could become public
If you are raising less than $100,000, you will need to disclose how much money you made, your taxable income, and total tax as reflected on your federal income tax return and certified by you. So get comfortable sharing a little personal financial information.

While Regulation Crowdfunding opens a new door for entrepreneurs, startups, and small businesses across the U.S., it comes with a fair share of rules and compliance. If you choose to go down this path, it can deliver money that you cannot find elsewhere; but proceed with caution, disclose as much as possible, and remember everything you say will be digitally recorded forever and “can and will be held against you in a court of law” if you make any material misstatements. So be honest, and remember you have about 180 days before this goes live.

The SEC’s new 685-page crowdfunding rules: What you need to know

Will These 5 Models of Crowdfunding Replace Angel and VC Investors?

Even if you ignore all the hype around crowdfunding, there can be no doubt that it is a real alternative for entrepreneurs to achieve visibility and funding today. According to articles on Entrepreneur last year, there are now almost 1,000 crowdfunding platforms in existence, currently estimated to add more than $65 billion and 270,000 jobs to the economy.

Crowdfunding today means any one of the following five quite different models:

  1. Rewards model
  2. Product pre-order model
  3. Donation good-cause model
  4. Interest on debt model
  5. Startup equity model

Will These 5 Models of Crowdfunding Replace Angel and VC Investors?

Crowdfunding and Venture Funding: More Alike Than You Think

Venture capital investors are scrambling to tap the wisdom of the crowd, financing projects that found their first legs in crowdfunding.
Crowdfunding platforms have become “a valuable source for dealflow” for venture capital investors.

Top 100 Crowdfunded Companies

Crowdfunding is more than just the latest trend — it’s an increasingly effective way to jumpstart a business with much needed cash.

Top 100 Crowdfunded Companies | Entrepreneur.com.