In class several of you have asked about crowdingfunding and its applicability to starting a business. From the Atlanta Business Chronicle here is a good read by Charles D. Vaughn, a partner and co-chair of the Securities Practice at Nelson Mullins Riley & Scarborough LLP in Atlanta. Here he describes crowdfunding in entrepreneur terms. As veterans we need to educate ourselves on all available sources of funding. Do your research.
Vaughn writes......On Oct. 30, 2015, the U.S. Securities and Exchange Commission (SEC) voted 3-1 to approve final securities crowdfunding rules under the Jumpstart Our Business Startups Act or JOBS Act (Regulation Crowdfunding). These long-awaited rules will allow startups and other small businesses to raise up to $1 million from both accredited and unaccredited investors through a website operated by either an SEC-registered broker-dealer or a new entity called a “funding portal,” also referred to as a “platform.” Individual investors will be limited in how much they can invest — generally between $2,000 and $10,000 per year depending on income and net worth. Notably, all investors can participate, regardless of income or net worth.
What companies are a good fit for crowdfunding?
While these new laws provide an attractive new path for small businesses to raise capital from ordinary people, a company should evaluate all of its fundraising options before choosing to crowdfund. Other funding options include reward-based and donation-based crowdfunding platforms like Kickstarter, Indiegogo and gofundme, which allow businesses to raise capital without selling securities and becoming subject to federal and state securities laws. Debt and peer-to-peer platforms like LendingClub, Pave and Borro allow entrepreneurs to take out personal loans to start a business without giving away equity in their business. Accelerators like Techstars and Y Combinator, angel investors and “seed” funds can aggregate investors to make early-stage investments, decreasing the time required to raise capital. Today, most startups still raise capital through private offerings to accredited investors, and this trend is likely to continue.
What is the new crowdfunding process?
The new crowdfunding process has detailed disclosure requirements. Businesses seeking to crowdfund will need to prepare a detailed disclosure document, similar to a business plan, as well as financial information. These documents must accurately describe the company’s business, leaders and material risks that the company faces. The funding portal, or platform, will also conduct its own independent background checks and diligence. Entrepreneurs should work closely with their lawyers and financial advisors to make sure they are ready to approach a platform. Selecting the right crowdfunding platform will be very important. Companies should carefully consider the platform’s track record, directors, officers, cost structure, industry focus and location.
For the right companies, crowdfunding under the new SEC rules could become a powerful and exciting new tool for startups and small businesses to raise capital. Companies should not jump into crowdfunding, however, without considering its pros and cons as well as other capital raising strategies that might fit them better.