Equity Crowdfunding 101
Unlike the rewards-only crowdfunding offered by sites like Kickstarter, equity crowdfunding allows companies to exchange a percent of ownership in exchange for funding. Equity crowdfunding is a great next step for companies after a successful rewards raise. Often companies need more capital in order to fulfill the product orders and demand resulting from their initial rewards crowdfund.
Companies like Ube, Pixel Press, and Sprizzi have all utilized equity crowdfunding on Fundable to grow and scale their business after proving demand through a rewards crowdfund. This hybrid rewards and equity crowdfunding has proven successful for businesses and was made possible through the passing of the JOBS Act.
The JOBS Act and Equity Crowdfunding
Equity crowdfunding was made legal with the passing of the JOBS Act, signed into law by President Obama in 2012. The JOBS Act contains 5 different Titles addressing specific challenges that startups and small businesses face.
Titles I and II Have Passed
Title I of the JOBS ACT was enacted as soon as the initial legislation passed. It aids businesses looking to go public through an initial public offering (IPO), exempting them from certain disclosures that deterred companies in the past from going public. Congress noted a declining trend of IPOs in the last 10 years, and created Title I to assist “emerging growth companies” — those with less than $1 billion in revenues over the past fiscal year.
Thanks to the enactment of Title II of the JOBS Act in September 2013, communicating with investors is much more streamlined. Prior to the JOBS Act, funding rounds were often closed in person, with lots of time spent networking and traveling to meet with investors in private circles. Title II, also known as General Solicitation, allows companies to publicly share and advertise that they are funding. Entrepreneurs can now easily harness the power of social media and the Internet to share their deal with investors across the country.
Titles III, IV, and V Under Review
Title III of the JOBS Act will allow companies to raise capital from non-accredited investors. It’s important to note that Title III of the JOBS Act is still being reviewed by the SEC and is not currently in effect. Title IV and V of the JOBS Act also remain under review and address additional initiatives to streamline the startup fundraising process.
With legislation ongoing, equity crowdfunding is still a nascent industry, but it has already made an incredible impact on the way that companies get started. At Fundable, we’ve had the opportunity to work with thousands of companies, with over $100 Million in funding commitments made via our platform.
Below are tips that we frequently share with members of our community. If you’re interested in utilizing an equity crowdfunding campaign, take a look before you launch.
5 Things to Know Before Starting an Equity Crowdfund
1. Equity Crowdfunding is Great, If You’re Ready
Before you launch an equity crowdfunding campaign, it’s important that you’re confident that your business is ready for investor scrutiny. Do you have customers, a product, or impressive pre-order numbers to rally around? Has your company been positively reviewed or highlighted by a prominent media outlet? These are things that investors will look for before putting money into a deal.
It’s important that you’ve achieved these milestones before you begin approaching accredited investors — especially angel investors and venture capitalists.
2. General Solicitation Empowers Entrepreneurs
General Solicitation (Title II of the JOBS Act) lifts an 80-year ban on private companies from publicly advertising their fundraising efforts. You can now publicly disclose your fundraise, attracting a much broader audience of potential accredited investors.
Whether tweeting the launch of your equity fundraise, or discussing how funding will help your company grow with a journalist, you now have unlimited means to connect with investors.
General Solicitation is regulated by the SEC (meaning you’re going to need a good lawyer and accountant — so keep reading), so you’ll need to take proper steps to ensure you’re following guidelines when sharing information publicly.
3. You’ll Need a Good Lawyer and Accountant
If you feel like your business is ready to pitch to investors, it’s important to seek legal and financial counsel. Crowdfunding is still a highly nuanced and regulated space. If you’re raising money by offering equity in your company, you are required by law to verify that the investor is accredited. The moment you begin publicly soliciting your fundraise (beyond a closed network of friends, family, and personal connections) you will be required to take “Reasonable Steps” to verify that your investors are accredited.
The SEC defines “Reasonable Steps” as reviewing IRS reports verifying the income of your investors and obtaining written confirmation (from a registered broker-dealer, SEC-registered investment advisor, licensed attorney, or certified public accountant) that they’ve taken reasonable steps to verify the purchaser’s accredited status.
Now is the time to do your research and find good counsel, before you begin approaching potential investors.
4. All Crowdfunding (Including Equity) is Social
Social media has always been a key component of rewards crowdfunding, but it plays an equally important part in equity crowdfunding, thanks to General Solicitation.
It’s important to plan out your marketing campaign before launching your equity crowdfund and determine what channels you’d like to utilize to reach more investors. LinkedIn LNKD -3.05% groups can be a great way to connect with angel investors and venture capital firms. Posts on Facebook and Twitter can create excitement about your company, and help you tap into personal connections that may be potential investors.
Investors are becoming more social as well, often completing some due diligence via the Internet. Before launching your fundraise, comb through all company and personal social profiles to make sure you’re putting your best face forward when investors begin their research.
5. You’re Closer to Accredited Investors Than You Think
The SEC defines an accredited investor as anyone whose net worth is greater than $1 million (excluding a primary residence) or whose individual income has exceeded $200,000 ($300,000 for couples) for the past two years. There are an estimated 8.6 million accredited investors in the U.S. Even if someone in your immediate network doesn’t meet these requirements, it’s very probable that within a few degrees of your contacts, someone does.
The first investor is the most critical, so if you’re able to find a fit within your network, you give yourself a huge advantage in the fundraising process. Once you find your initial accredited investor, they may be able to connect you with additional groups or contacts that may be interested in your business.
The execution of the JOBS Act has already opened up millions of dollars of potential equity crowdfunding investments and has made incredible improvements to the funding process. While the future of equity crowdfunding has yet to be fully determined, it’s definitely an incredible time to be an entrepreneur.
Read original story at Forbes.