Guest Post by Mary Juetten
Equity crowdfunding under the JOBS Act (Jumpstart Our Business Startups) is not yet legal but reward, donation, and perk-based crowdfunding (think Kickstarter, Indiegogo, RocketHub) have been very active over the past couple of years.
Raising money as a donation to a cause by offering a reward in the form of a special event or early access to a product is both a common and legal form of crowdfunding. The Pebble watch campaign raised over $10 million dollars but that was an anomaly in terms of dollars raised. The watch was the reward and the funders financed its production.
In contrast, the “reward” under equity crowdfunding will be an ownership interest in the business. Equity shares will be issued instead of a watch or a donation and the person will become a shareholder. Under equity crowdfunding, there will be limits on the amount that the average person can invest. However, satisfying the income thresholds for accredited investors – the lowest of which is $250,000 – will not be required.
Equity crowdfunding is not legal until the SEC promulgates the rules. In the meantime, companies interested in crowdfunding should start preparing now. Many of the requirements are good practices for any business and necessary for accessing capital, regardless of the source.
The JOBS Act outlines some items that will be necessary to pursue equity crowdfunding(1):
- Company must be registered and incorporated in the US;
- Names of the Directors, Officers, and any Shareholder with more than 20% of ownership;
- Business Description and Business Plan;
- Financial Statements with varying levels of attestation depending on the amount of money being raised;
- Prior year Tax Returns;
- Goal for Capital Raise and Target Dates (progress updates are also required);
- Planned Use of Capital Raised;
- Share Price and methodology for determining share prices;
- Detailed information on the Ownership and Capital Structure, including terms for the shares being offered under crowdfunding; and
- Terms of any other outstanding shares and the differences between those outstanding and those being offered.
It’s a long list and certainly not exhaustive because the SEC may add more requirements to protect investors and the public.
Business Plan Requirement
First, having a current business plan is important to any business, but much of the current startup or small business advice is to create a business model instead. This allows the flexibility to pivot. Some examples include the Business Model Canvas(2) and the Lean Canvas.(3)
Alexander Osterwalder’s book Business Model Ontology outlines the Business Model Canvas for both startups and businesses. The Canvas is now available in an online format. Ash Maurya has created a derivative called the Lean Canvas, which is for early stage startups or inventions with a problem/solution focus. While these are excellent online tools, business plans for equity crowdfunding purposes will likely be much more involved.
Second, anyone who has done a full-blown business plan realizes that often the plan is out of date shortly after completion. The exercise of discussing and modeling the business is often where the value lies for the company. However, for crowdfunding, that business plan will have to be available to potential investors and must be up to date. Online business plans rather than models will be the way to proceed so that the contents can easily be updated. Check out the Crowfundingroadmap site for an example of the virtual business plan.
Finally, the contents of the business plan will be displayed on the Internet. This means that you should not disclose your secret sauce or too much information on your products or process to imperil your Intellectual Property rights . Although most entrepreneurs know that success lies in the team and execution, it is good business sense to protect your ideas appropriately and avoid accidentally disclosing too much.
The list above is daunting, especially for those who have used rewards based crowdfunding. However, with proper planning, companies can be ready for equity crowdfunding as they advance their businesses.
(1) Thank you to www.crowdfundingroadmap.com for the minimum requirements list.
(2) Visit the website for more information on http://www.businessmodelgeneration.com/canvas.
(3) http://canvanizer.com/how-to-use/business-model-canvas-vs-lean-canvas includes all the tools.
Disclaimer: This article is intended to be general information and nothing in this article constitutes legal advice. Please consult with an attorney before making any intellectual property decisions.
Mary has over twenty five years of varied leadership, management, and business and financial consulting experience including successful turnarounds in the public and private sectors. Mary is a recovering accountant, holding both a CA and CPA, a Bachelor of Commerce from McGill University, and a JD from Arizona State. Her prior work experience includes financial auditing with Richter, Usher, & Vineberg, consulting with Price Waterhouse, and executive positions with Vancouver Community College, AMEC Training & Development, and most recently a one-year consulting contract as Chief Operating Officer with a local online startup, youchange Inc.
In addition to volunteering as a mentor, Mary is active in many local groups and organizations including Arizona Tech Council, 85 Broads Phoenix, Arizona Small Business Association, TiE, ASU Women in Philanthropy, and national crowdfunding organizations CFPA and CfiRA.