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Source: Bill Clark
Bill Clark is the CEO of Microventures, a securities broker/dealer that uses a process similar to crowdfunding which allows backers to invest $1,000 to $30,000 in startups online. You can follow him on Twitter @microventures.President Barack Obama is expected to sign the JOBS Act today, officially opening up a new source of funding for small companies and startups. Much of the attention so far has been on this component of the bill because it would allow financing via crowdfunding. Participants can raise as much as $1 million a year without having to do a public offering — a step requiring state-by-state registrations that can cost thousands of dollars.
The belief — and hope — is that this type of funding will open up more opportunities for capital to flow into startups. That, in turn, will help grow new companies and create new jobs.
The reality is that crowdfunding may not be right for every startup. Some business models are more capital intensive and wouldn’t fit within the constraints of crowdfunding. There are several factors to consider before pursuing this type of funding. Let’s take a look at what they are, and what this new piece of legislation might mean for your next fundraising round.
1. Consider Prior Raises
If you have raised money previously and that total is more than a $1 million in the last 12 months, then you will not qualify for the crowdfunding exemption. If you can wait until the 12 months are up, then you should be OK to use the exemption in the future.
2. Have a Communication Plan
Have you thought about how you would communicate with potentially a 1,000 or more investors brought in through a round of crowdfunding? You may not have enough time in the day to address all their questions or concerns. The last thing you want is for this to take valuable time away from running your startup or business. If you use a funding portal, that company should help you manage your communication with your investors. Companies like Caplinked also provide tools that a startup can utilize to message with all of its investors at the same time.
3. Keep Your Secret Sauce In Check
Some companies don’t want to share a business plan or idea unless those involved sign a non-disclosure agreement. The fear is that a competitor will get their hands on it. If you put your business plan on a funding portal that anyone can look at, then this could be a problem. You do, however, need to give potential investors enough information to make a good decision, so here are the items you need to provide so that investors can still do their due diligence: company name, address, bios of the officers and Board of Directors, a business plan and description of the business, and how you intend to use the funds raised.
4. Show Them the Money
If you don’t want your competitors to see how much volume you are doing or how you make money, then you probably don’t want your financials out in public. (This is one of the reasons that Facebook waited to do its IPO.) But if you crowdfund, you may need to provide different amounts of financial information to your investors depending on the amount you raise. Here’s the breakdown:
- Less than $100K: You are required to provide your income tax returns and have your financial statements certified by your CEO.
- $100K to $499K: Your financial statements will need to be reviewed by a public accountant.
- $500K to $1 Million: You will need to provide the investors with audited financials.
5. Lawyer Up
The investments you receive through crowdfunding will be for equity in your company, so you will need to have a lawyer structure the deal and set up the necessary funding documents. It would be ideal to have a Private Placement Memo that would disclose all of the risks to an investor. The legal documents can get pretty expensive. At the low end I would estimate you might pay $7,000 for a business that is not very complex. The costs just go up from there.
6. Look at Front Costs
There are a lot of costs that you will have to pay before you even put your opportunity online for people to invest in. Between audited financials, legal fees, and paying to hold your money in escrow, you could spend $10,000 to $15,000 before you raise your first dollar. If you are only raising a small amount, the cost might not be worth it. Or, if you’re a startup, you might not have the funds to set up crowdfunding.
7. Have a Plan B
Because the SEC has 270 days to implement the regulation, startups will not be able to use the crowdfunding exemption until early 2013. In the meantime, there are a few other options startups should consider. They can raise what are essentially loans from sites like Prosper.com or LendingClub. Or, they can get a peer-to-peer loan to test out, so they can see if crowdfunding would be right for them. AngelList is a good service to list your startup on, and it will make your company visible to active investors.
The JOBS Act is a bipartisan bill which aims to make it easier for startups to grow, hire employees and contribute to the United States’ sluggish economic recovery.
The bill classifies startups as “emerging growth companies” that can turn to online investors to raise much-sought-after startup capital — similar to how websites such as Kickstarter let users raise money for films, books or other projects.
Those companies would also be able to sell up to $50 million in shares before having to register with the Securities and Exchange Commission and have up to 1,000 shareholders — double the current limitation.
“One of the great things about America is that we’re a nation of doers,” said President Obama at a White House signing ceremony, where he was flanked by members of Congress and some of the nation’s top entrepreneurs.
“We think big, take risks and believe that anyone with a solid plan and a willingness to work hard can take even the most improbable idea and turn it into a solid business.”
Supporters of the bill, including AOL co-founder Steve Case, welcome it as a sign that politicians are beginning to understand the vital role entrepreneurs play in the American economy.
Case has been an extremely vocal supporter of the JOBS Act. He raised support for the bill in the tech community and amongst entrepreneurs, politicians and the general public.
“It’s a sign that folks in D.C. came together in a bipartisan way to focus on the role that entrepreneurs play in innovating and creating jobs and putting policies in place that will maximize the likelihood of the U.S. remaining one of the world’s most entrepreneurial countries,” Case told Mashable.
“The US isn’t the leading nation of the world by accident. It was the work of entrepreneurs that led us to be the leading economy in the world. Entrepreneurship is the fast track to job creation.”
Case says the JOBS Act is only a first step in a larger fight to make it easier for entrepreneurs to create new businesses, hire more workers and create economic growth.
“There’s still work to be done,” added Case, pointing to high-tech immigration as the next challenge. “There’s a balance in celebrating this achievement and thanking everyone that made this possible. Overall, it’s going to be a good step forward and a good day for entrepreneurship in America.”
The bill was hailed as a rare bipartisan success by Eric Cantor (R-VA), the House Majority Leader.
“Both parties in Congress, the President and entrepreneurs like Steve Case came together on this bill that will increase capital formation and pave the way for more small-scale businesses to go public and create jobs,” said Cantor in a statement.
“The bipartisan JOBS Act represents an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong bipartisan support.”
House Republicans introduced the bill late last year. It sailed through the House on a 390-23 vote, but met fierce opposition from some Senate Democrats. Sen. Dick Durbin (D-Ill.) argued that the JOBS Act goes too far in deregulating business and warned Congress would regret passing the bill.
The Senate passed the bill in late March on a 73-26 vote after amending it to tighten up investment restrictions and requiring startups to disclose financial information to investors. That vote sent it back to the House, where the amended version passed last week 380-41.
President Obama was an early supporter of the JOBS Act and was widely expected to sign it without delay.
Can the crowdfunding-focused Jumpstart Our Business Startups (JOBS) Act really spark entrepreneurship, economic growth and hiring?
Rep. Patrick McHenry (R-N.C.), a staunch advocate of crowdfunding and contributor to the #FixYoungAmerica campaign to promote youth entrepreneurship, believes it can.
Businesses can’t raise money through crowdfunding in a meaningful way right now because of federal restrictions and red tape. McHenry wants to change that. A bill he introduced to near-unanimous support in the House became part of the foundation for the JOBS Act, which has been passed by Congress and awaits President Obama’s signature.
McHenry says he’s fed up with the pattern of entrepreneurs being forced to finance their projects through their own lines of credit, sometimes backed by the value of their homes. He sees two problems with this way of doing things: First, it can be difficult to get credit, and second, the value of many homes tanked during the financial crisis of 2007-2008, making mortgage-backed financing a much weaker option for capital-seeking entrepreneurs.
“The result of these realities is plain and simple,” writes McHenry in his chapter for the #FixYoungAmerica book. “Countless young, ambitious entrepreneurs are out of luck as they look for capital to expand and compete on the open market.”
Crowdfunding, says McHenry, is the solution to those problems. It would allow entrepreneurs to raise money from many different investors, each pitching in a small amount compared to angel investors and their giant checks. Theoretically, that mitigates the risk of investment for each contributor.
McHenry first became aware of the concept after reading a letter written by Rep. Darrell Issa (R-Calif.). Issa, a former technology CEO, is one of the most technologically astute members of Congress. In the letter, he wrote 33 questions to the chair of the U.S. Securities and Exchange Commission, which regulates the U.S. stock market.
“Serving as chairman of the House Oversight Subcommittee for issues related to financial services and banking regulations, I had the luxury of reading this letter before the ink had dried,” writes McHenry. “I soon realized I was flipping through the pages of a letter that would transform the way Congress prioritized capital formation.”
One particular question caught McHenry’s attention: Would the SEC allow small businesses to engage in crowdfunding?
Crowdfunding, says McHenry, piqued his interested because it reminded him of the way political campaigns raise money — often, from lots of donors giving small donations (PACs aside, of course).
McHenry threw his energy into researching crowdfunding as a mechanism for investing in small businesses. To learn more, he went to websites such as IndieGoGo, which lets people raise money from “the crowd” for charities, businesses and other projects. Eventually, McHenry was convinced that crowdfunding was part of the solution to drag America out of its economic slumber.
“I was becoming a diehard fan of crowdfunding, especially since it utilized online technology to increase small business access to new sources of financing,” writes McHenry. “Social networks were not just for keeping up with friends — they could become marketplaces for everyday investors and entrepreneurs.”
After McHenry introduced his Entrepreneur Access to Capital Act, he used a House Financial Services Committee hearing about it to spark a conversation on the Hill about crowdfunding.
“As each witness spoke,” writes McHenry, “members and staff began to gain interest in crowdfunding, a form of capital formation that was foreign to them that very morning.”
The idea was met with some resistance from McHenry’s colleagues who believed crowdfunding was too risky of an investment platform. McHenry, though, says that dispute was a blessing in disguise — it got entrepreneurs fired up and focused on explaining why the status quo wasn’t working.
Eventually, the Financial Services Committee unanimously approved the bill and sent it to a full vote in the House. It sailed through on a 407-17 bipartisan vote, after receiving President Obama’s blessings in a jobs speech. McHenry’s bill was then included in a larger small businesses reform package — the JOBS Act — which has been sent to the White House for the president’s signature after being amended in the Senate.
“After observing how quickly our nation’s leaders were able to learn and embrace a new and democratic form of capital formation,” writes Rep. McHenry, “I am more confident than ever that the U.S. will once again retain its title as the world’s most dynamic and entrepreneurial marketplace.”
Do you think crowdfunding is a viable way to jumpstart American investment and growth? Should President Obama sign the JOBS Act into law? Sound off in the comments below.
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