To be an ethical and hardworking Entrepreneur is a noble pursuit. Our country and the uplift of mankind has been the result of such women and men–those whose ideas, passion, and drive have spurred them to start and grow businesses. Each country’s–and the world’s–prosperity depends upon them. Yet their ideas, passion, and labor alone cannot businesses build. Capital, preferably invested not borrowed capital, is required. As an entrepreneur you are most acutely aware that access to capital is an essential ingredient for survival, growth, and sustained success.
Investment Crowdfunding now provides a realistic opportunity for all ethical Entrepreneurs (with business plans, leadership skills, and products and services customers want or will want and will be willing to pay for) no matter education, sex, age, ethnicity, sexual orientation, or country of origin. Each of these entrepreneurs might just now have a shot at accessing such capital—up to $1 million per year.
Investment Crowdfunding can be accessed whether you are an individual just thinking of starting a business and want to raise $50,000 or own or work for a $30 million in sales business that needs up to an additional $1 million in equity or debt. Investment Crowdfunding just may be the tool you now need for your business. Entrepreneurs across the U.S. (and from outside the U.S. if a U.S. based corporate type entity is used) NOW have a realistic way to access needed capital from Investors across the fifty states—and beyond.
Entrepreneurs can now access this capital through what is known as Investment Crowdfunding–a regulated national process permitting U.S. based businesses to raise up to $1 million per year over the internet through the services of SEC and FINRA regulated crowdfunding portals and broker/dealers. The process is (though won’t seem) relatively inexpensive and it will involve lots of your time, money, and commitment to successfully pursue it—though without assurance you will be able to raise any of the funds you seek.
A whole new Crowdfunding industry has being developed to support your efforts–should you choose investment crowdfunding– and make it less costly, less risky, more efficient and more transparent than raising capital has ever been for small and small middle-market businesses.
Q & A
If I Or My Company Has An Interest In Crowdfunding, How Exactly Might I Go About It?
Check out how others are doing it. For now (until I can find a better way), go to the place where all federally regulated crowdfund investments have been filed--at the United States Securities and Exchange Commission. You can access each of them, though it takes a few steps to get there.
Go to the “Filings” column and select, “Company Filings”. Once there, along the left side headings, select “Full Text (Past four years)”. To the right of the search box, in red, click on “Advanced Text Search.”
You’ve now found the right screen for searching--and you now need only do 3 things before you press the “Search” button:
- In the line labeled text, type in the word, “filing”.
- In the line labeled (in bold), “In Form type”, use the drop down arrow to select, “C” (which is quite a ways down).
- Lastly, in the same row, change, “10” to “100” using the drop-down. NOW press the “Search” bottom. You should now see each and every crowdfund filing--and all companies are legally required to make these filings before commencing regulated national crowdfunding. (Note: Don’t assume that if you find a form it automatically means the company is currently trying to raise funds. If the crowdfunding offering is, on the date you access, closed to investors the forms still remain accessible for searching.)
Two you may want to explore in detail (by reviewing their entire filing and each exhibit in detail) are Native Hostel (filing number 1 on May 16, 2016 and Cleveland Whiskey) as I use them on my case study blog.
You’ll need to spend an hour or more to get a fair idea of what’s required of the entrepreneur in order to use investment crowdfunding.
As you’ll soon see, whether you are a start-up business or are an existing business, you’ll need a specific detailed written business plan which describes the business and the market niche, the need for the capital, the plan of operation for the business, and the specific uses for the funds.
You will also need any historical financial information for your business as well as a budget and financial forecasts. Once you have your plan, you’ll need to decide how much capital you need, look at how much capital of your own would be prudent to invest, and determine your shortfall.
If the amount is $1 million or less, Investment Crowdfunding (which includes both loans and equity investment) is your possible solution.
In deciding between debt or equity the concepts of Harvey Firestone (who built Firestone Tire and Rubber from 1 employee to over 20,000 in the early 20th century) should be kept in mind: debt should only be used to cover a major needed capital investment (and then without over-leverage), a temporary need, such as a business with predictable seasonality (such as snowplowing) or a business growing very fast and profitably (on paper) which needs to temporarily borrow to meet its expansion needs while going through a process to raise more equity financing.
In each of the filings, you’ll see either the question and answer format that the SEC provides in Form C or all the information required by Form C question and answer format, plus some, contained in the filings.
To better, and more comprehensively think through your business and fundraising strategy, I suggest going to The North American Securities Administrators Association forms developed in the 1990’s (you’ll need a couple of hours at least to browse) yet doing so is absolutely worth your time to think the questions through.
Pick the most recent form and most recent instructions and review by clicking here:
Are You Deterred Yet? Read This
Investment Crowdfunding is here and your competitors or potential competitors--large and small-- are going to have it as a financing tool and, perhaps, competitive edge. If you, as an Entrepreneur of or in a small middle-market firm or smaller, don’t want additional capital—to sustain, to grow, to start—you’re amongst a very small minority. If you need or will need capital, and feel that Investment Crowdfunding may be a solution for you, there are steps you can and should take now if you are likely to want to use Investment Crowdfunding.
Ask yourself these questions: If the answer to any of them is NO, then you should not use Crowdfunding:
- Do you and your business have a high standard of integrity?
- Do you and your business have a good reputation?
- Will friends and family invest in the business under the same terms you’re seeking from others and will your investment structure be fair for all of them?
- Do you and will you have the discipline to run your business like a business and not a piggy-bank for dinners, outings, vacations, and other personal expenses?
- Are you prepared to be a good fiduciary to your investors (that is fulfill your duty to be loyal to the company and the investors, be careful and not reckless in running the business, and do your best day-in and day-out) running the business for their benefit (though other factors may be able to be taken into account)?
- Are you prepared to listen to advice and criticism from all quarters and report honestly and frequently to your investors about the good and the bad?
- Are you prepared to have your business go bankrupt, losing all of your and their investment, and potentially losing relationships with friends and family alike?
- Are you prepared to be confronted with lawsuits or governmental investigations if you are accused of fraud or failing to disclose all material information which you could have and should have disclosed had you used a “reasonable investigation”?
- Can you realistically provide an exit for each of your investors over a reasonable period of time with a high likelihood that they’ll each stand a good chance of compound returns on their investment into your dream at or above the historical (since 1929) average U.S. stockmarket return of about 8% per year?
- Are you prepared to make your business plans and financials public so everyone in the U.S. can, if they want, scrutinize your business and your management team?
If your answer is YES to each, then Investment Crowdfunding might just work for you and your business. If your answer is NO, given your likely competition over time, you just might want to consider what would be needed to have your NO become a YES at some future point in time; you (or a part of your business) might just need it.
Your Business Plan & What Resources You Need for It's Implementation
There are many businesses which provide business plans, accessible on-line. Many of the registered funding portals have, or will have, affiliated companies which provide such services (and whose format may be required by the funding portal). Whether or not you decide to use one of these each entrepreneur is still encouraged to review the forms and manuals I referenced above through the NASAA website.
Once you have your basic business plan and forecasts, you’ll need to decide the type of debt or investment you’ll need from Investors and what you’re prepared to pay or give up it. You’ll also need to understand what sort of terms Investors may need, whether your business can afford it, as well as whether it is fair to both Investors and the business alike.
Remember, it’s in your own self-interest to ensure that you treat Investors right—you have to raise the money and you may need them or others like them in the future. If you need to raise equity, you’ll have to determine the value of your Company and describe how you arrived at it as well as how you arrived at the offering price of the equity or debt investment offered. You should also be aware that most business owners believe their business to be worth substantially more than it is shown to be in the event they try to sell it. (Keep this in mind when you determine what will be fair from an investor point of view.)
In the cases of both equity and debt, you’ll have to decide and describe how and when the Investors will see the benefits of their investment in you and your Company.
If you lack the skills to determine whether all of this is a worthwhile investment of your own time and money, you’ll need the guidance of financial and other professionals. Realistically, this process could take anywhere from 1 to 9 months or more.
Based upon studies done in the late 1990s and early 2000s, those Entrepreneurs who spent more time and resources ensuring they had a sound business plan and financial forecasts saw substantially more fund raising success with SCOR offerings (those I reference above) than those who did not.
If I'm Going to Give Up Equity--Or Use Investment Crowdfunding to Obtain a Loan (Assuming it Is Permitted)--How Much of the Equity of My Company Will I Have to Offer to Investors?
Each case is different. It depends on your business. Ultimately the market—prospective Investors—will determine whether the amount of equity you are offering is worth the risk of their investment in your Company. Because most Entrepreneurs lack the knowledge and expertise in this area, you should seek advice from a qualified professional. You would be well advised to use a Broker-Dealer, Registered Investment Adviser, and Business Attorney who deals in the area, qualified Valuation Consultant, CPA or other qualified financial adviser permitted to give such advice.
A Funding Portal IS NOT, by statute, permitted to provide pricing or other investment advice to Companies for which Investment Crowdfunding is offered on its portal. It is far easier, and probably more accurate, to put a value on a stable existing business than it is upon the value of a yet-to-be formed start-up.
With start-ups, it might be that you decide to offer a minimum return to investors provided that the return does not consume more that a specified percentage of the equity. Here, qualified professional help will be most valuable, though registered funding portals and broker-dealers may have short-hand (and less expensive) simple alternatives in the event professional help is too expensive.
Ok, Once I Have My Plan, Determined It Realistic, Have My Financial Forecasts, and Have Decided How Much of the Company I Should Probably Give Up, What's Next?
If you’re going to need to raise between $100,000 and $1,000,000 of debt or equity through Investment Crowdfunding, you’ll need to get a state licensed or qualified PCAOB CPA firm to perform a review of your Company financial information in accordance with generally accepted auditing standards (GAAS). This is true whether you have a start-up or a business which has been in existence for three generations.
The costs for this audit may run in the few thousands of dollars for a new company with few or no operations to well above $20,000 for established businesses with sales in the tens of millions. (CPA reviews cost substantially less than an audit.) A way for these larger businesses to reduce the audit costs may be for them to form a holding company into which they transfer the operations of the existing business, or set up a subsidiary into which they spin out that line of business which will need the capital; this will require consultation with the Company’s attorney and CPA and will be subject to the final SEC Crowdfunding rules.
Why Should I Care About Investment Crowdfunding Right Now?
Because, to repeat, Investment Crowdfunding is here and your competitors or potential competitors are going to have it as a financing tool and, perhaps, competitive edge.
Which Funding Portal Should I Use?
That depends on a number of factors including you, your business, the funding portal, its services and charges, and whether your capital-raising success might differ based upon the funding portal you choose.
If my memory serves, the SEC, in either a proposed or final rule narrative expected that between 50 to 100 companies would apply to be registered funding portal but that the economics would result in a likely sustainable playing field of 25 to 30.
While my estimate is higher (relative to the longer term), you can locate the FINRA registered funding portals here.
As of June 2nd, 2016 there were 11 listed, 10 websites live, and less than 5 with currently active companies in their capital-raising window. This will increase substantially over time. So investigate before you select.
What Other Information Might Be Worth Me Reviewing?
- Read the statute on the points dealing with Crowdfunding. Yes, it’s detailed, and you may not understand everything but after reading it you’ll better understand what’s required.
- Browse the final rule release and read the final rules (located towards the end of the 685 page release)
- Also read NASAA Issues Small Business Advisory on Crowdfunding
- Read the May 13, 2016: Compliance Guide for issuers
- Read the Regulation Crowdfunding Interpretations
Determine, with the help of trusted advisers, whether Investment Crowdfunding is worth your time and investment. There is no guaranty whatsoever that any investors will even have the slightest interest in investing money in or loaning money to your business. And if they do, you might be surprised that it would be under far different terms than you or your advisers may imagine.
For example, many angel investors who invest in private companies do so wanting between a 15 to 25% annual return and with a guaranteed 10% return. Most all businesses and planned businesses in the U.S. could never afford anything close to this.
Check out some of the various registered portals and some of the industry publications such as these here.
Consider whether you might instead of using regulated crowdfunding (geared for everyone regardless of their income or their assets), be better advised to raise investment capital solely from Accredited Investors. Accredited Investors are investors who can be verified to have a net worth, exclusive of their home and related indebtedness, of at least $1 million and annual incomes of $200,000 for each of the past 2 years and expected in the current year (or $300,000 with their spouse [domestic partners in recognized civil unions likely don’t now but eventually will likely qualify]).
Many of the regulated Investment Crowdfunding (for unaccredited investors) portals or broker-dealers may also be hosting offerings directed solely to accredited investors. While the Entrepreneur is required to provide all material information about the investment to each Accredited Investor, no particular format is required (though each portal or broker-dealer may require somewhat of a standardized format) though timely governmental filings are required.
The documentation and process for those entrepreneurs geared solely to accredited investors will be easier, but the costs may be higher and chances of raising capital will be less, particularly for start-up businesses and businesses which are not scalable because most of these businesses have little likelihood of providing the higher returns such accredited investors have historically sought and received (though regulation crowdfunding is likely to drive down the average returns sought by accredited investors).
LASTLY, keep in mind that your plans, and forecasted returns, are likely to take more time, cost more money, and provide less of a return--than you or your investors--hope for and plan to achieve. You’re an entrepreneur--which means you’re optimistic, yet the optimism should be tempered with the realistic obstacles you’ll need to successfully overcome and ensuring you have the resources you need. Planning is essential to success even though the plan you execute is rarely the same as the one with which you start. So start.