By: Steve Schwartz, Senior Manager, CohnReznick
Crowdfunding has been used for years to finance projects, ideas, and even early-stage companies. Through crowdfunding, individuals have the opportunity to contribute funding for the companies and ideas they like best. If enough people like the company or idea, those contributions can translate into a considerable amount of money.
Equity crowdfunding takes it a step further, offering investors a financial stake in the success of the start-up. But for a long time, only accredited investors (those who have a net worth of at least $1 million, or an annual income of at least $200,000), could participate in equity crowdfunding. This all changed earlier this year when the SEC’s final rules for Title III equity crowdfunding went into effect, giving entrepreneurs another catalyst to fuel their businesses.
A game-changer for growth companies, Title III enables companies to offer and sell securities through funding portals on the Internet, broadening the audience of people who can engage in equity crowdfunding. As of June 20, 2016, the Financial Industry Regulatory Authority (FINRA) is currently regulating eleven SEC-registered crowdfunding portals.
For companies considering an equity crowdfunding campaign to raise capital, there are a several important considerations to make.
Part of the plan
Crowdfunding under Title III provides companies with one more option for raising capital while also offering additional options for investors who want to get in on the ground floor of what could be a very successful business. Companies who choose to launch a crowdfunding campaign should do so as part of a strategic, comprehensive plan for raising capital from multiple funding channels. The launch of a crowdfunding campaign does not exclude a company from also utilizing venture capital or private equity to fund growth.
In the crowd, companies will be competing for investment dollars with other exciting, innovative organizations, so it is critical to develop and implement a strategic marketing campaign that will elevate your offering over all others. A successful crowdfunding campaign will require a good story to tell investors—complete with business plans, financial statements, and projections.
Working with intermediaries
To launch a crowdfunding campaign under Title III, companies will need to utilize the services of an SEC-registered broker/dealer or online crowdfunding portal. These intermediaries connect companies with investors; they cannot offer investment advice or recommendations, or solicit purchases, sales, or offers to buy securities offered or displayed on their portal.
Each one has different services, fee structures, and reach, so it is important for companies to choose their broker/dealer or portal carefully. Getting the campaign in front of the right investors will be critical to achieving capital-raising goals.
By utilizing the portals, companies are opening the opportunity to invest in their company to the general public. Potentially, this means selling an ownership interest in the company to unknown investors. For this reason, it is essential that the terms of the investment are clearly defined and communicated to investors.
Once a company has executed a successful equity crowdfunding campaign, it will need a plan for continuing to communicate with new investors. Companies should ask themselves: How much information are we willing to share? Which rights to information will investors have? What information will we share with investors on a regular basis?
Companies may consider creating an investor-only section on their websites where periodic updates about your company’s progress, product, service or technology enhancements, financial results, etc. can be posted. Transparency is the key if you want to keep your investors informed and hungry to make additional investment in the future.
A successful crowdfunding campaign may require more transparency than a company is accustomed to sharing with external audiences. To build trust and confidence with prospective investors, companies should be comfortable with sharing operational and financial information publicly. If a company is not comfortable sharing this information with the world, it may be better to explore a more proprietary method of raising capital.
Before launching an equity crowdfunding campaign, it is crucial that companies have a plan for balancing the amount of money they plan to raise with the on-going reporting and communication requirements. The opportunity to sell to the general public is exciting for any company, but it is important to maintain a solid balance between fueling the needs of growth-oriented businesses and providing oversight to protect investors eager to support the next generation of innovation.
Enabling Baltimore’s start-up community
With the help of organizations like Betamore, the Baltimore region is establishing itself as a hub for entrepreneurs and start-ups pushing the limits of technology and innovation. Raising capital to grow these businesses is always a challenge, no matter your location or industry. That is why the additional funding channel that has been opened by Title III is so important. We are excited about the potential that equity crowdfunding can provide and look forward to seeing Baltimore-area entrepreneurs take advantage of this opportunity to take their businesses to the next level.
If you have questions about using Title III to grow your business, please feel free to reach out to Steve directly!
CohnReznick LLP is one of the top accounting, tax, and advisory firms in the United States, combining the resources and technical expertise of a national firm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands.