Historical data has shown in order for your project to be a success you must raise at least 30% from your own personal network — that takes time and preparation. By Ruth Hedges (Founder & CEO, CrowdfundingRoadMap & FundingRoadMap)
The passage of the JOBS Act and the legalization of debt and equity based crowdfunding is a very exciting proposition. The community may open their arms and wallets, giving your business the funds you need to thrive and investors a chance to profit.
Unfortunately, what many crowdfunding companies don’t realize is that debt and equity-based crowdfunding is a good deal more complicated then donation-based campaigns. It is not as simple as setting up a deal room on Kickstarter and emailing your network.
There is preparation that needs to be started now in order for you to be eligible to do equity-based crowdfunding come Spring next year.
The crowdfunding provision of the JOBS Act mandates that companies meet certain regulatory hurdles, such as audited financial statements and incorporation before listing their company on equity-based crowdfunding platforms. In order to get you ready for your crowdfunding campaign, we have put together a list of actions companies must take now to be prepared.
- In order to raise funds on a platform, you must be established and incorporated in a way that gives you the ability to issue the shares you are promising. Sadly, some companies will waste time and money doing this incorrectly delaying their ability to raise capital.
- The devil is in the details. You need to have a solid, well researched, clear and detailed plan of what you’re doing and where you’re going with your business. No one will invest in an effort lacking transparency. Investors want to know where their money is going and how it will be managed. The law stipulates that your business plan, financial statements and other disclosure documents must be presented to the SEC, the funding portal and investors to be able to equity crowdfund. Making sure you present your business in a way that will allow future flexibility as well as keep you out of hot water with the IRS is critical. If a company representative “makes an untrue statement of a material fact or omits to state a material fact,” they will be held liable. Professional representation is highly recommended!
- Remember when you’re creating all of this material that the plan for your business, executive summary and video is introducing your business model to the crowd, and first impressions count, as you may not get a second chance. If it’s not complete or accurate and doesn’t make a good impression, you will not only lose possible fans and followers, but your chances of getting funded will dramatically decrease. Ensuring you have a credible business plan that is marketable and easy to understand will go a long way in helping you achieve your funding goals.
- Creating a financial statement that is both well researched and mathematically accurate is an art. Are your market projections accurate? Are you being too ambitious and running the risk of losing potential investors? Are you giving away the farm and control, by undervaluing your business? Have you included all potential costs that you might incur? How will you be using the funds? Have you created your capitalization table correctly? Creating financial statements that do not misrepresent your overall potential is a delicate balance of knowledge, experience and keen understanding of the investment market. Get it wrong and it can cost you BIG in the long run. The sad thing is you often don’t realize what you don’t know until it is too late. The valuation process can take a very long time — so get started early and make sure you have qualified advice.
- The JOBS Act imposes certain requirements for companies seeking to utilize the crowdfunding exemption. For instance, financial statements of the issuer must be certified by the principal executive officer of the issuer to be true and complete in all material respects for raises under $100,000. $100,000 to $500,000 they must be reviewed by a public accountant who is independent of the issuer, using professional standards and procedures established by the SEC. If you’re raising more than $500,000 (or such other amount as the SEC may establish), you will need audited financial statements. Make sure you have an accounting team that understands the process!
- Are your networks ready? Historical data has shown in order for your project to be a success you must raise at least 30% from your own personal network — that takes time and preparation. To be successful, it is critical your on and offline networks are primed and ready to go. This takes time, effort and an understanding of basic investor relations that will build your networks within the new laws. Lack of network preparation is the number one reason why crowdfunding campaigns fail. Crowdfunding is not free it will cost you in time away from your business, friends, family and life — which is the number one reason we are advising clients to prepare now so they will be successful in the future!
The good news is there are resources available to help you succeed and prepare for your campaign, but it is important to get started now. One of the events we are recommending is a Crowdfunding Bootcamp on October 9th and 10th in Las Vegas. It is one of the bigger industry events and is designed to help participants walk away with a plan in hand and the resources and connections to make it happen. In addition to all of the major funding platforms there will be law firms, accounting firms, VC firms, Angel investor groups and professional service providers all giving out advice and free services to ensure you are prepared by the end of the second day. The best part they will also be giving away one $10,000 (cash and services) prizes to the best business.
The bottom line, whether you go to the bootcamp or prepare on your own—you need to start the process now in order to raise capital with crowdfunding in 2013.
Editor's note: Got a question for our guest blogger? Leave a message in the comments below. About the guest blogger: Ruth Hedges is the Founder and CEO CrowdfundingRoadMap and FundingRoadMap, a virtual system for business planning and due diligence reporting. A leader in the crowdfunding movement, she worked with the Startup Exemption team to get the Jobs Act bills passed, is a founding board member for Te Crowdfunding Professional Association Organizing, CrowdFund Intermediary Regulatory Advocates and a council member of Crowdfunding Accreditation for Platform Standards.