Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
On May 16th, 2016, entrepreneurs gained a new potential funding pool thanks to rule changes pertaining to equity crowdfunding. The JOBS Act addressed old SEC rules and changed the law so that individuals not considered to be accredited investors by the SEC might invest in certain businesses.
Equity crowdfunding enables many investors to each own a small stake in a new business. Rather than having only one or two angel investors or venture capitalists back a business, equity crowdfunding permits multiple individuals to support appealing ideas with smaller sums. The hope is that small businesses will be able to raise the money needed for growth and expansion as a direct result of access to a greater number of possible funding sources. Current regulations allow businesses to raise up to $1 million via equity crowdfunding over a 12-month period.
Because equity crowdfunding is still in its infancy in the U.S., there are no comprehensive statistics to aid in gaining a clear understanding of whether the concept has lived up to its promise. The total number of businesses funded in this manner remains to be seen, as well as the overall success rate for obtaining funding, to say nothing of whether investors have found it to be a worthwhile method of investment.
Equity Crowdfunding Basics
Equity crowdfunding occurs on an online platform. Each such platform must be registered with the SEC and should also be a FINRA member. There are, at present, numerous available platforms; prior to deciding on a particular one, be certain to ensure that it meets these basic requirements (both regulatory and otherwise).
Equity crowdfunding is an appropriate avenue of pursuit for businesses in need of large amounts of capital and which are prepared for the associated levels of investor accountability. Ideally, those businesses would already have an active customer base which might be interested in investing. Businesses utilizing a corporate (C Corporation) structure may experience the most equity crowdfunding success, as they limit shareholders’ overall liability, a point that is extremely attractive to seasoned investors.
There are numerous rules and regulations surrounding equity crowdfunding. The SEC’s primary goal in enacting those regulations is to protect potential investors. Much of the burden is placed on the crowdfunding platform. Each platform must conduct background checks on all company principals and must also review each company, itself, prior to granting them access to raise funds on their site.
Each company must provide investors with the following information:
- Its name, legal status, address, and website
- The names of all directors and officers, their respective positions, how long they’ve been in those positions, and the resumés of those individuals covering the previous three years
- The name of anyone holding an equity stake in the business of 20% or greater
- A business description and a copy its business plan
- The number of employees working for the business
- Information regarding investment risk
- Financial statements
- The amount that the company is seeking to raise
- A description of how the money will be used
- The terms of investment
Further regulations and necessary information should be explained via the platform.
Who Can Invest in an Equity Crowdfunding Campaign?
The JOBS Act expanded the pool of those eligible to invest via equity crowdfunding, which was, until recently, only open to accredited investors. Thanks to Title III of the Act, individuals may invest as follows:
- “If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or five percent of the lesser of your annual income or net worth.”
- “If both your annual income and your net worth are equal to or more than $107,000 then, during any 12-month period, you can invest up to 10 percent of your annual income or net worth, whichever is less, but not to exceed $107,000.” (SEC website)
Choosing a Platform
Selecting the appropriate platform for your campaign is essential. That platform will be your investing home for the duration of the campaign. Businesses are only permitted to utilize one platform at a time – simultaneous parallel campaigns cannot be run. Selecting the site for your campaign that is the best fit for your business is a critical step in connecting with the right investors. Some platforms cater to different industries and attract investors specifically interested in those industries. When choosing a platform, ensure that your goals are aligned with those of the platform.
Crowdfunding platforms are evolving in various directions as they begin to more deeply understand investors’ goals. Therefore, rather than giving an in-depth analysis of each site (which will probably change in a few months’ time), here are some questions to consider as you evaluate each platform, as well as a list of platforms that have earned positive reputations in the equity fundraising sector:
Points To Consider
To whom do they appeal? Investigate the number of investors utilizing each platform and the statistics available, such as how regularly individuals invest and the average investment size.
How successful are they? Most sites specify the amount raised on their platforms and list a few of their success stories. You may need to dig a little deeper in order to discover both the average amount raised and how many of their campaigns have been successful.
Who else has used their platform? Some portals focus on specific industries or companies in specific stages. Others focus on the amount that a company is trying to raise. When evaluating platforms, consider whether they specialize in any way and seek to identify others who’ve been successful on that platform.
What do they charge? Each platform is responsible for meeting the many crowdfunding regulations and they each pass the attendant costs down to their users. Many will charge you during the application process to determine whether your company is a good fit for that platform. There is also, generally, a percentage-based fee on the money raised. While you should be aware of the cost, don’t select a site solely because due to their pricing structure.
What services do they offer? Some platforms may be hands-off, while others will help create your campaign in order to ensure its effectiveness. Select a platform featuring a level of service with which you’re comfortable.
Does it seem like a good fit? You can research endlessly and eventually locate the “best” platform, but it’s also important to consider whether you like them and whether they seem to be a good fit for your particular situation and preferences.
These are some of the most popular equity crowdfunding platforms:
- Crowdfunder: www.crowdfunder.com
- Microventures: microventures.com
- Wefunder: wefunder.com
- Indiegogo: equity.indiegogo.com
- Fundable: www.fundable.com
- EquityNet: www.equitynet.com
- SeedInvest: www.seedinvest.com
- CircleUp: circleup.com/entrepreneurs
- RocketHub: www.rockethub.com/funding
- FlashFunders: www.flashfunders.com
Tips for a Successful Campaign
Equity crowdfunding is still relatively new – the rule changes creating the sector first went into effect in May 2016. To help you safely maneuver through this new fundraising minefield, follow these guidelines:
Once you select a platform, you’ll need to create a site profile. Meanwhile, you should be perfecting your pitch deck. Your individual story is essential to help facilitate a connection with potential investors. Decide the best way to tell it and use the most appropriate technology, such as photos, videos, or slideshows.
Your deck should clearly highlight your vision and the level of validation or traction you’ve experienced thus far. It should outline both how you fit into the current market and the problem you’re solving for your target audience. Showcase your product or service and explain your revenue model. After all, investors want to know just how you’ll be generating income. Then, illustrate your marketing and growth strategy to limn your plans for the future. Your team is also an important part of the fundraising process. You should highlight their experience and industry expertise. Next, you’ll need to share your financials and pinpoint your competition. At the end of your deck, you should have clearly related what your company requires and exactly what you’re seeking.
If you’re a new entrepreneur, you’ll likely find that investors are gun-shy. As a rule, they strongly prefer experienced teams. However, if you’re able to illustrate that your business has already gained traction in its industry, you’ll likely find some brave souls interested in learning more.
Fundraising takes time, especially with respect to investors who’ll want to learn more about you and your business. While equity crowdfunding removes some of this burden by providing a place to share information, it also makes it easier to make smaller investments. This means that, while investors may be willing to take a chance on your business, they may not opt to commit the larger sums commonly encountered with equity investments. Hence, you may need to gather a (virtual) crowd and seek to interest individuals who are not accredited investors in your offering.
In addition to preparing your deck, you’ll need to consider the terms you’re willing to offer. Every company is different, so while it’s useful to examine others’ term sheets, it’s important to realize that yours can and will differ. The best way to create your own term sheet is in consultation with your lawyer.
Please note, this article is intended as a general overview of the equity crowdfunding process. To better understand the rules and regulations and how they apply to your particular situation, consult with a lawyer, with your chosen crowdfunding platform, or, even better, both. While researching this article, I found plenty of superseded data online. For the most up-to-date information, check the SEC website. (The compliance guide can be found here.)
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.