Equity crowdfunding poised to explode under SEC proposal

Last week the Securities and Exchange Commission (SEC) proposed sweeping changes to Regulation Crowdfunding (equity crowdfunding or Reg CF) as well as the other private capital-raising exemptions. The proposals come just months after the SEC closed comments on last summer’s Concept Release. The commission sought to harmonize, simplify, and streamline the exemptions. As SEC Chairman Jay Clayton stated, “The complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth.  These proposals are intended to create a more rational framework that better allows entrepreneurs to access capital while preserving and enhancing important investor protections.”

The proposed changes to Reg CF are particularly significant. Congress enacted this exemption as part of the JOBS Act of 2012 to open the private markets to retail investors. The idea was everyone could invest in hotshot startups but also local businesses that supported communities. It would also allow entrepreneurs traditionally excluded from the angel investor/venture capital circuit a better chance to thrive by democratizing capital raising. Signs showed Reg CF had started to fulfill its potential. According to Crowdfund Capital Advisors, which curates equity crowdfunding data, since 2016 successful Reg CF companies had pumped almost one billion dollars into local economies.   

Equity Crowdfunding Map

Still, complaints persisted. Many companies thought the $1.07 million raise limit too small. And rules restricted Accredited Investors to relatively tiny amounts despite no such constraints with Reg D. Moreover, regulations forbade issuers from discussing and gauging interest in their raise before spending money on legal and accounting services. Finally, retail investors meant messy cap tables that dismayed later investors.

SEC addressed long-standing equity crowdfunding complaints in proposal

Yesterday’s proposal solves all these issues and sets the stage for a paradigm shift in U.S. capital raising. Among the potential rule changes:

  • Raise the overall to limit to $5 million: While not as big as some had hoped, this new ceiling allows for larger institutional players to invest alongside retail investors.
  • Remove Accredited Investor limits: Successful equity crowdfunds usually have a mix accredited and nonaccredited investors. Accredited Investors send important signals to each other and the larger market. Removing Reg CF’s arbitrary limit increases the chance for successful raises. And it partially eliminates the need to “stack” Reg Ds on top of Reg CFs so Accredited Investors can fully participate.
  • Allow ‘testing the waters’ communications prior to the raise: The ability to gauge interest in a raise before having to spend money on professional services is critical. Also, equity crowdfunding companies tend to be newer and less experienced with complex securities laws. This gives companies a better idea of their raise metrics, while still protecting investors. by preserving liability for misleading statements.
  • Allow Special Purpose Vehicles: Allowing issuers to “clean up” their cap table by placing Reg CF issuers into an SPV was perhaps the most consistent Reg CF failing. According to the SEC proposal: “In particular, public feedback has indicated that allowing the use of such vehicles could address concerns associated with managing the potentially large number of direct investors that could result from a crowdfunding offering, as those investments would be held through a single purpose entity.” This also alleviates concerns about Reg CF issuers having to prematurely register as public companies.

Equity Crowdfunding can explode under proposal

Indeed, these long-sought changes could have lasting effects on the private capital markets. It could truly democratize capital raising, allowing everyone an equal opportunity at potentially lucrative investments. It could encourage entrepreneurs normally off the angel investor/venture capital radar to bypass traditional-funding methods. And issuers can synergize crowd effects by melding their investors, supporters, and customers. And it could geographically disperse capital investing away from the few hubs where it currently happens.

According to the SEC press release, the comment period will remain open for 60 days following the publication of these proposals in the Federal Register.

By Jossey PLLC via www.thecrowdfundinglawyers.com

SEC Commissioners talk Crowdfunding, Crypto before Congress

The Securities and Exchange Commission’s (SEC) commissioners testified last week to the House Financial Services Committee. The otherwise nondescript 3.5-hour confab briefly surveyed the crowdfunding and crypto landscape. But Congress missed a huge chance to examine the commission’s scattershot guidance and arbitrary enforcement. Its desultory policymaking hinders the economy and harms those it seeks to help.

This hearing followed one on the supposed menace of private capital markets. But unlike there, Commissioners provided balanced testimony. And only Robert J. Jackson Jr.—who (*eye roll*) holds five Ivy League degrees—promoted extreme anti-capitalist views.

SEC progress on Reg CF crowdfunding could rescue drowning exemption

The hearing began well with Patrick McHenry (R-NC) chastising Reg CF’s shackling.

McHenry: One exemption that warrants modernization is the crowdfunding exemption. My original crowdfunding bill which was included in the JOBS Act was only a few pages long, 11 pages in fact. I appreciate the SEC and their hardworking staff creating 685 pages worth of regulations around those 11 pages. The absurdity of this I have pointed out a number of times since then. So, you’ve given me at least the rhetorical value of talking about the burden of SEC regulation of making an exemption and a public law completely meaningless because of the impact of the costs.

As the bill’s sponsor, however, his concern proved sadly unique as the hearing wandered about. Everyone knows Reg CF’s shortcomings. And the commission seems finally to be acting.

Chairman Shallow-End Jay Clayton:  You can get up to a million-dollar company going with Reg Crowdfunding and some of our other exemptions. It’s really hard to grow a business from say a $1M business to a $50M business . . . if there are things that we can do to facilitate capital formation in that gap so our small businesses can become larger I think that’s an area we should focus on.

The SEC recently sought public comment on reconciling and improving the private exemptions. Commenters sent many good ideas. Long awaited action is hopefully afoot.

SEC token and crypto guidance remains woeful

Less promising is token-sale progress. The SEC seems no closer to solving the crypto riddle than during the ICO craze, with one exception.  

Congressman McHenry mentioned the Blockstack Reg A+ token sale and several are irked by Mark Zuckerberg’s corporate crypto scheme. But commissioners couldn’t remove crypto uncertainty. Commissioner Hester Peirce, aka Crypto Mom stated such when discussing utility tokens and policy-by-enforcement that only seems to bother her.

Crypto Mom: I would like to see us be a little more forward thinking in ways that we might accommodate unique aspects of digital assets. For example, digital assets that are utility tokens I don’t know that the securities laws framework that we have right now is the appropriate framework for them and so I’d like for us to think about creating some kind of safe harbor.

Crypto Mom: But enforcement is a poor way to announce policy. We need to be clear in writing our rules and we need to make sure we provide the guidance that firms and individual need as necessary. We understand that our rule book is complicated, and we work with well-intentioned firms and individuals to help them comply with our rules.

The SEC’s April Digital Asset “guidance”: dazed and confused

This wantonness colored the hearing’s best exchange when Ted Budd (R-NC) mocked the SEC’s now-infamous token ‘guidance,’ which has become a poster child for bureaucratic drivel.

Budd: In April Fin Hub published a framework for investment contract analysis of digital assets which included 60 plus factors for determining whether or not the SEC would consider a digital asset a security. In a statement released alongside your framework your colleagues Bill Hinman and Valerie Szczepanik indicated that the framework is not intended to be an exhaustive overview of the law. But rather an analytical tool to help market participants . . . [H]as the guidance helped resolve their most important questions?

Crypto Mom: [No]

Budd: So last question, when can market participants expect and exhaustive overview of the law so that they can get the regulatory certainty required to continue to innovate and create American jobs.

The SEC plagues entrepreneurs with ambiguous and arbitrary enforcement

The Commission’s name brand, massive budget, and economic power incentives risk-averse, snails-pace progress on issues that won’t wait.

Indeed, the SEC abstains from the only recent securities success: Reg D. Onerous rules knifed Reg CF and Reg A+. And rules encourage companies to stay private rather than face the many IPO burdens.

All the while, former SEC staff and commissioners get massive paydays to interpret and cajole because no one can discern motives behind mountains of disclaimers and subpoenas. Staffers justify this as needed “flexibility.” As NPC Valerie Szczepanik noted, “The lack of bright-line rules allows regulators to be more flexible.”

Just so, as these pages have stated:

This is true but has other effects. It leaves regulators with massive discretion. And it gives them enormous power over the economy with no responsibility for the results. It mandates entrepreneurs approach them hat-in-hand for permission. And it makes them sought after speakers on the conference circuit.

But it’s a zero-sum game. Every unit of power Ms. Szczepanik reserves for herself and her colleagues removes it from job producers. Indeed, every ambiguous pronouncement shunts billable hours to lawyers and compliance professionals instead of research or marketing. Those building tomorrow’s economy need the flexibility not bureaucrats. They will power our future long after Ms. Szczepanik takes her professorship or retires to a nonprofit. 

Congress missed a chance to examine the SEC’s misguided de facto policymaking

Entrepreneurs facing intense market pressures need flexibility. Warren Davidson’s (R-OH) soliloquy struck the matter and is worth fully quoting:

Davidson: Recently director of corporation and finance Bill Hinman stated in a fireside chat that the SEC prefers an approach to digital assets through facts and circumstances rather than a bright line test. This company by company approach prevents regulatory clarity and it suffers from some of the charm and inefficiency of third world power structures. For this reason, although innovators are in America and innovation is still occurring in America capital is fleeing. Not to avoid our regulations to find efficient regulatory clarity. And they’re finding it elsewhere. We need a simple set of rules that apply equally and clearly to all. That is the premise of a bill I know you won’t talk about. But the framework that the market needs. Where is the capital going? Places like Singapore, the UK, Switzerland, have laid out clear frameworks for digital assets.

Meanwhile the US hundreds of companies await No Action Letters, with only two having been issued thus far by the SEC. Now I agree with you that the ICO situation represents bad outcomes, but the root issue remains. America does not have a clear regulatory framework. Consumer and investors are harmed by that status quo in fact Commissioner Peirce nailed the explanation, the SEC should not only be concerned about fraud but also about opportunity. Our failure to provide regulatory clarity fails Americans on both counts. We have become the world’s land of opportunity the best destination for goods, services, capital, intellectual property and more by anarchy or by inaction. With respect for digital assets it’s time for deeds not words.

Yet instead of forcing Shallow-End Jay’s hand, Davidson sought Crypto Mom who, of course, agreed.

The problem is the SEC’s results not intentions

The SEC undoubtedly tries.

But too often we get years-long dithering before eye-rolling guidance or subpoena floods. And people never subject to market forces live comfortable lives in prestige whilst hindering tomorrow’s economy.

By Jossey PLLC via www.thecrowdfundinglawyers.com

Congress Looks to Thwart Startups

Congress sought to thwart startups by limiting early-stage capital in a remarkable, but little-noticed move last week. A House Financial Services Subcommittee hearing began with Chairwoman Carolyn Maloney (D-NY) lamenting the “troubling” success of private capital. And it sunk from there.

Indeed, the academic-and-regulator-laden panel argued Congress should: (i.) restrict private capital, (ii.) impose burdensome costs, and (iii) strip retail (crowdfund) investors from risky but high-return startup opportunities.  

Congress should not thwart investment opportunities for startups despite academic advice

The panelists frowned upon landscape shifts most would think praiseworthy. For example, Renee Jones, Professor of Law at Boston College worried startup founders now negotiate more favorable terms for received capital. The power shift meant founders could more ably parry pressure to immediately “prove their concept and profitability, so they could proceed along the pipeline toward an eventual IPO.” Previous pressures included board seats, vetoes, and most often founder ouster.

Mike Pieciak, Vermont Commissioner of Financial Regulation, argued state agencies should granularly monitor Reg D investors. This despite its spectacular success and the extra burden inherent with double jurisdiction.

But most alarming was Elisabeth de Fontenay, Professor of Law, Duke University. In both her live and written testimony, Ms. de Fontenay resembled a Chinese functionary describing Hong Kong protesters. She viewed startups as state vassals and retail investors as submissive subjects. Stemming the decline of public companies may require “mandating” firms go public. The government must impose “paternalistic interventions,” lest small investors get “thrown to the wolves.”

According to Ms. de Fontenay, startups that seek capital from these would-be babes in the woods are likely failures-in-waiting or scheming ne’er-do-wells. They are “the worst of the lot,” those with the “worst prospects,” because legitimate capital seekers “don’t want them.”

Companies seeking retail investment are not the dregs of the startup world

To see if this is true one might peruse Reg CF portals WeFunder, Start Engine, or Republic. Each boast a slew of promising companies in myriad industries. Or listen to Jonathan Cohen, President & Chief Executive Officer, 20/20 GeneSystems, Inc. On a Heritage Foundation panel last year. Mr. Cohen stated his promising biotech company had already raised Reg D money but chose a Reg CF round anyway.

Or Ms. de Fontenay may have trotted to DC Startup Week. Many events took place while the professor was in town. Throughout DC dozens of innovative and exciting startups brandished wares, practiced pitches, and sought investment.

It is unsurprising the panelists were mostly pedigreed in America’s elite universities. While these institutions attract much intellectual capital, they don’t produce comparative impact. More likely they’ll graduate career bureaucrats and lecturers seeking to rule tomorrow’s “doers.”

In Life After Google, George Gilder wrote about America’s decaying institutions:

Feeding on the air of entitlement of fading upper-class institutions that accomplish “little with a lot” of other people’s funds, the Harvard initiative reflected the increasing inebriation of elite American education. Focusing on stopping progress, barring new power plants, dismantling chemical facilities, mobilizing against Israel, and other reactionary pursuits, Ivy institutions are pursuing fancies of a declining intellectual and business elite, full of chemophobic nags and luddite lame-ducks quacking away on their miasmic pools of old money as the world whirls past them.

Congress and the SEC have already thwarted startup capital through regulatory burdens  

Douglas Ellenoff, Partner, Ellenoff Grossman & Schole LLP paddled alone as a voice of sanity in a sea of credentialed madness. “We should ensure in my judgment these markets are operating optimally and regulate only to the extent absolutely necessary.” The sole panelist that advises clients on securities-law vagaries, Mr. Ellenoff also noted the costs in both expense and opportunity inherent in the current regime. Specifically Reg CF: “The burdens of any kind of preparation of disclosure that needs to be filed with the SEC is an undertaking it takes time energy and resources and for up to 1.07M financing the costs of doing that is a meaningful percentage of the proceeds raised in those deals and it’s out of pocket before you even know if you’ve raised the money.”

SEC Reg CF Report Costs
Source: Securities and Exchange Commission

Scammers have not overtaken unsophisticated investors

While the JOBS Act that enabled retail investment in startups via Reg CF and Reg A+ was not the day’s focus, it formed background. Indeed, a central theme was how much government should trust its citizens with their money.  

To her credit Ms. de Fontenay didn’t blanch. “Based on the evidence at hand, the easiest and most defensible means of simplifying the registration exemption regime would be to eliminate the current exemptions for retail investors that have had immaterial uptake thus far.” Mr. Pieciak more subtly demurred crowdfunding is “niche” and presumably not worth the bother.  

Reg CF Commitments: Source Crowdfund Capital Advisors

But “immaterial uptake” may be in the eyes of the beholder.” According to Crowdfund Capital Advisors 1,900 Reg CF issuers have supported over 10,000 jobs. And panelist Dr. Andrew Lo, Professor, Massachusetts Institute of Technology Sloan School of Management written testimony stated, “the firms using crowdfunding have exceeded their targeted offering amount by 300%, implying significant excess demand.”

Congress thwarted Reg CF and Reg A+ from the start but they are still growing

But these numbers would carry further materiality had the SEC not straddled Reg CF with suffocating rules. Both government and industry recognize the problems and have proposed fixes, but heretofore none have materialized.

Unfortunately, Reg A+ has not yet taken flight but again government obstruction deserves the blame. But the SEC’s recent Blockstack token-sale qualification will hopefully juice the exemption.

A final concern is scammers. They supposedly will flood private investors with unseemly offers that existing protections cannot counter. As Ms. de Fontenay stated, “[W]e already have some evidence of this adverse selection, given the poor performance, noncompliance, and even outright fraud with the new Regulation A and crowdfunding exemptions.”

But Reg CF disagrees. As Mr. Ellenoff stated, “Notwithstanding a remarkable amount of outspoken investor protection advocacy to the build-up of the passage of the JOBS Act, Title III Regulation Crowdfunding in particular, it is now acknowledged by regulators that none of the doom-and gloom prognostications of fraud or litigation has presented itself.” Thus, those worrying retail investors getting hosed have precious few actual examples.

Congress should nurture not thwart startup capital formation 

Congress should applaud itself for opening private markets to retail investors. The fact is the rocket VC-IPO model doesn’t suit many startups. And most people risking their money do so cautiously as the message boards under Reg CF raises attest. Thus, the JOBS Act gives more companies a chance. Particularly those from nontraditional locales or with unconventional founders. Congress should see the enormous potential and embrace alternative and private means of capital formation. It is good for the economy, investors, and entrepreneurs.

By Jossey PLLC via www.thecrowdfundinglawyers.com

Why Blockchain Startups Should Equity Crowdfund

Blockchain startups should equity crowdfund their projects. Today most don’t. Instead, they rely on Silicon Valley venture capital dinosaurs. VCs create massive exits for themselves whilst hindering flexibility and draining vitality from dynamic companies. It is the old way, and it should end.

Over 70% of startups have capital needs. And raises always involve tradeoffs. But for those boldly creating Web 3.0, using a 1987 funding model defies logic. Since the JOBS Act of 2012, blockchain startups can now equity crowdfund via Reg A+ and Reg CF. Visionaries can bypass VC middlemen and merge their funders and users into one crowd.

Venture Capitalists are running away from blockchain startups

Anything new and exciting brings scammers. The 2017 ICO craze flooded swindlers and unprepared honest brokers with gobs of cash but little corporate or government oversight. VCs were not immune. Fraudsters hosed them with other FOMO investors. Now they have retreated, creating a supposed cash crunch. As one analyst noted, “VCs still like blockchain they just like it less.”   

The numbers agree. Crunchbase reports VCs have given $3.38 billion to blockchain ventures this year representing a major drop from 2018’s $12.86 billion.

Source: Crunchbase

This remains so even when removing tainted ICOs.

Source: Crunchbase

According to Bloomberg, this year blockchain startups will see 60% less cash. Famed VC firm Andreesen Horowitz typifies this trend. It has dropped funding from $850 million last year to $75 million.

But despite the dip, VC’s love blockchain. Since 2014, they have favored these startups over everything else. According to Crunchbase July 2018, “set a record for the number of nine-figure rounds raise worldwide…

$15 billion in venture capital deal flow, July was a good time to raise $100 million or more.”  Just ten years ago Series A yielded a few million dollars, today that’s a seed round.

Blockchain startups can break replace venture capitalists with equity crowdfunding

No doubt, many blockchain startups see the dip as worrisome. After all, some conflate success raising cash with market success. But blockchain startups should view it as an opportunity. Grabbing big quick money may garner press and speaker invites but has real drawbacks.

According to one Harvard professor VCs lose 75% of their bets with over a third completely busting. And VCs force out founders of startups that win. They also get management power and exert pressure for quick returns.

Blockchain represents the future web, venture capitalists funded the old one

Beyond control and pressure are doctrinal concerns. Instead of the decentralized, individualized future blockchain represents, a small group of elite investors get richer. Familiar names like Union Square Ventures and Sequoia Capital buy more yachts whilst the public often pays with intrusive access to their lives and data. Interestingly those funding blockchain startups seem oblivious to their role in this cycle, as per a recent Andreessen Horowitz post:

In an era in which the internet is increasingly controlled by a handful of large tech incumbents, it’s more important than ever to create the right economic conditions for developers, creators, and entrepreneurs. Trust also enables new kinds of governance where communities collectively make important decisions about how networks evolve, what behaviors are permitted, and how economic benefits are distributed.

Of course, through its model AH thwarts the “right economic conditions for developers, creators, and entrepreneurs . . . and a fairer way for how “economic benefits are distributed.”

Blockchain promises to fix Web 2.0 maladies, particularly control of personal data and embedded, censorious middlemen. The next web will fell gatekeepers, protect user data, and aid peer-to-peer business models.

This what George Gilder in ‘Life after Google’ called the “great unbundling.” Yet if VCs control the purse how decentralized can the new web be? Just as blockchain can reorient the individual’s relationship with the web, so should blockchain startups discard old funding models for the crowd.

Equity crowdfunding is more democratic and inclusive but harder

Equity crowdfunding allows blockchain startups to bypass VCs. It merges users and investors. Capital raising becomes democratic, inclusive, and mission oriented.

This path is harder. It means additional risk and effort. But those with the courage and moxie to create a new internet should welcome the challenge. Equity crowdfunding via Reg A+ and Reg CF get results and allow someone beside Fred Wilson to profit.

After years delay, the SEC finally approved Blockstack’s Reg A+ token sale. Now other blockchain startups can follow. Reg A+ has a $50 million limit, tokens can be instantly liquid, and the raise is open to all. For the less ambitious, Reg CF has a $1.07 million limit and provides restricted securities. Yet it is viable. Reg CF portal Republic recently secured the first token air drop. Like Reg A+, Reg CF is open to all.

Blockchain startups are rightly proud of creating a better web. One that is better, safer, more individualized, and democratic. An internet free of suffocating data silos and chokepoints. Thus, it makes no sense they should approach funders who created the current mess. Blockchain’s promise should include capitalization. It should be open to everyone. Blockchain startups can make this happen.

By Jossey PLLC via www.thecrowdfundinglawyers.com

How to Choose an Equity Crowdfunding Portal

Once you’re ready to choose an equity crowdfunding portal you’re pretty far along the equity crowdfunding path. By now you’ve already decided that equity crowdfunding is right for your company. You’ve reviewed four keys to a successful equity crowdfund. And now you (and your lawyer) are ready to go portal shopping.

Indeed, the company must consider many factors in choosing an equity crowdfunding portal. And because portals sell 90% of equity crowdfunded securities the right “fit” is crucial. For instance, the biggest portal may not be best if your company will likely to mostly attract local investors. And a specialty portal may look great but if the investor list is skimpy, you’ll need to move on.

Thus, here are some considerations when choosing an equity crowdfunding portal

Federal and state equity crowdfunding portals; different strokes for different companies  

To start, most companies look to the federal portals. To the extent equity crowdfunding has entered the public conscious its likely through Reg CF the federal exemption with the $1.07M limit. There are currently 45 Reg CF portals located throughout the country. But really only a few actually warrant consideration if you don’t have a massive ready-made crowd or marketing budget.

Equity Crowdfunding Portals
Source: Crowdfund Capital Advisors

But really the market looks more like this.

Thus WeFunder, Seed Invest, and Start Engine are industry leaders with Republic, and MicroVentures also having market share.

Companies should know that all but one of these is in California. So if you’re not West Coast think about what you can offer them as much as what they can offer you. Do you have cool technology? An interesting idea? A new approach to solving old problems? Be aware there is a supply and demand issue with the big West Coast portals because they have large investor lists you gain access to with acceptance on their platform.

Being in the South, Midwest, or East Coast is not necessarily a deterrent to acceptance. In fact, some portals stress they scout companies throughout the country. But be prepared to pitch!

If you choose a federal equity crowdfunding portal, be aware of the differences.

WeFunder: A great all-purpose portal with a massive investor list that has funded all sorts of startups with the top being Food & Beverage, Software, and Entertainment. And a soccer team!

Start Engine: A leader in the token/crypto space that accepts Bitcoin, has run its own token offering and is leading secondary-market development with their recent approval as an Alternative Trading System.

Republic: Part of a family of startup platforms together with AngelList and Product Hunt. “Mission driven” portal that also is a crypto leader. It was the first to do an air drop and has a unique Note Token digital asset.

Seed Invest which was bought by Circle last year and MicroVentures which split from Indiegogo are going through transitions but are still industry leaders.

Still other Reg CF portals remain as viable options. For example, TruCrowd a Chicago-based portal has also developed three specialty portals https://musicfy.us/ (Music), https://cryptolaunch.us/ (Tokens), and https://fundanna.com/ (Cannabis). But current offerings are slim.

State-based portals can be a viable alternative to federal Reg CF equity crowdfunding portals

But not all companies are good fits for the big West Coast portals. For example, businesses that aren’t likely to scale, whose investors will mostly be local, or those with strong state appeal may be better staying in-state.

Although all investors must be state residents, these portals can offer advantages. 1. There is likely to be less compliance costs with a smaller regulatory burden and supportive state government. 2. Higher limits (although not always). This means one big investor can really jumpstart a raise. 3. Opportunity for localized wealth creation, and. 4. Less marketing costs.

As of 2017 according to lawyer Anthony J. Zeoli most states had already approved state portals or were in the process.

For a list of state-crowdfunding rules see here.

And at least one innovative platform has combined the two. Silicon Prairie offers a Reg CF portal along with state-based portals in Michigan, Iowa, Minnesota, and Wisconsin where state limits are as high as $5 million.

Your equity crowdfunding portal choice will factor into your raise’s success

Sherwood Neiss, principal of the analytics firm Crowdfund Capital Advisors, estimates the next two years will bring 3,400 companies, half a billion dollars, and over half a million investors into the equity crowdfunding world. And help from Congress or needed changes by the SEC would bring much more.

And as more companies take advantage of the opportunity, they will have to choose the right equity crowdfunding portal. Indeed, your choice of an equity crowdfunding portal will go far in determining the success of the campaign.

By Jossey PLLC via www.thecrowdfundinglawyers.com

Schedule a call or video conference


This post is for informational purposes only. It does not represent a contract, offer, or any legal obligation on the part of Jossey PLLC. Many factors go into a successful raise including appeal of the product, competition for the product, the quality of the marketing, operating history of the company, experience of management, and ability to self-generate crowd investors. Legal and regulatory compliance is only one part. Investing in small companies and startups carries lots of risk, there is no guarantee your company will have a successful raise.

Four Keys to a Successful Equity Crowdfunding Raise (Reg CF)

A successful equity crowdfunding raise takes work. Have you decided equity crowdfunding (Reg CF) is right for your company? Great! You have joined a revolution in business capitalization. You will lead your industry. And you some earned media and free marketing is on the way. And, oh yeah, cash!  

But saying yes is only the first step. A long sometimes difficult road awaits. But as an entrepreneur you already know nothing worth doing comes easy. Luckily for you, there are industry professionals (like me!) to guide you through the process of a successful equity crowdfunding raise.

Here are four keys to a successful equity crowdfunding raise:

1. Hire a lawyer to help your equity crowdfunding raise succeed  

Some entrepreneurs don’t like lawyers “in their way” or believe that standardize forms reduce representation needs. Yes, as a lawyer who helps companies succeed in the equity crowdfunding process, I am biased.

But consider these facts:

The Reg CF regulations are 685 pages. They are full of mind-numbing jargon and securities legalese. (And Reg CF changes may be coming). Plus, they cover a range of topics not directly related to the legal documents like solicitation rules, adherence with state laws, year-end reports etc. A competent lawyer will guide you through the process soup to nuts.

Also, you may need other legal work to prepare your company for a successful equity crowdfunding raise including amending and restating your articles of incorporation, reviewing bylaws, converting legal entities, and other compliance issues that always arise.

A lawyer can discuss pros and cons of particular financial instruments, different portals, and recommend CPAs, marketers, and other professionals you may need.

The bottom line is if you don’t think you need a lawyer for a potentially million-dollar securities transaction you’re not ready for this and may want to consider Kickstarter.

2. Lead Investors jump start a successful equity crowdfund raise

One question that arises when explaining the process to potential clients is why they need a lead investor. After all, isn’t that what the crowd is for? A lead investor signals the larger investor community you have a serious raise. The worst thing that can happen in a Reg CF equity crowdfund raise is for the issuer to languish weeks without substantial investment. No marketing, superior product, or brilliant team can overcome a lack of initial investment.

Even before that, lead investors provide the big portals with confidence your company is worth hosting. The big portals don’t want for companies trying to access their investor lists. Lead investors can also ensure a raise will hit its minimum target giving the portal confidence to place your company.

Portals also usually have minimum investment triggers before they will promote you to their investor list. If you don’t have that minimum guaranteed up front the chances having a successful equity crowdfunding raise greatly drops.

At the least that minimum should be $25k but you may want to hold out for $50k. And remember what the wise man says: The better you are to the crowd, the better the crowd will be to you.   

3. Together Everyone Accomplishes More

You’ve likely heard the acronym for TEAM since little league. And as an entrepreneur you’ve chosen your team carefully. These are the people you grind with, who accept the long days and stressful situations. But not all are salesmen, maybe you have technical people, or financial people who don’t usually sell your company.

Everyone is part of your raise. That includes your lawyer! Everyone has social media, Linked In, Twitter, Minds etc. Everyone should be responsible for bringing in investors. And it’s not just those directly employed. Your lead investors, board members, friends, family, acquaintances that believe in you are your “ambassadors.” You need them for buzz. They should be on board beforehand and be willing to open their networks to you. (SEC regulations apply). Keep up with them even after you’re live. After all we’re all salesman whether we like it or not. It’s three months out of your life. Do it.

4. Commitment to a successful equity crowdfund raise is a commitment to your company and your vision

If people told you this would be easy, they lied. You’ll have to manage your company and the raise simultaneously. You’ll have potential investors asking you questions on message boards, media and marketers contacting you, complaints, concerns, congratulations. You should prepare for this and prioritize what is most important, delegate what you can, and plan how to maximize your raise daily and weekly.

A successful equity crowdfund raise signifies that not only are you an industry leader but that you can effectively multi-task. And at the end you should have a big pile of money, because that’s what it’s all about right?

Of course, you now have investors and the responsibilities that go with that (psst you need a lawyer!). But you will have taken a major step toward achieving what you started the company for in the first place.  

A good team a great plan and you’re on your way

These are few things you can do to ensure you have a successful equity crowdfund (Reg CF) raise. For more insight check out this article. From the portal perspective see here. Click here evaluate whether your company is right for equity crowdfunding. For other options beyond Reg CF see here about Reg A+ and Reg D. See here for an overview of Jossey PLLC equity crowdfunding services.

Schedule a call or video conference.

By Jossey PLLC via www.thecrowdfundinglawyers.com


This post is for informational purposes only. It does not represent a contract, offer, or any legal obligation on the part of Jossey PLLC. Many factors go into a successful raise including appeal of the product, competition for the product, the quality of the marketing, operating history of the company, experience of management, and ability to self-generate crowd investors. Legal and regulatory compliance is only one part. Investing in small companies and startups carries lots of risk, there is no guarantee your company will have a successful raise.