By Mary Juetten
While the JOBS Act turns four years old on April 5, we won’t have the final rules for Title III equity crowdfunding for non-accredited investors until May 16. That’s less than sixty days from now. What should entrepreneurs do to take advantage of this new avenue for capital?
This past October, the SEC made the following significant changes for business owners (issuers in the rules), which should lessen the cost of Title III:
- Review of financial statements, no audit for raises of more than $500K for first time crowdfunding;
- No requirement for ongoing audits or reviews; and
- Allowed use of any independent professional accountant.
In preparation for the May enactment of Title III, I reached out to finance professionals to see what advice they had for business owners and crowdfunders. In the first installment of this two-part series, I’ll outline their recommendations on where to start and how to succeed with Title III. (Need advice on identifying and protecting intellectual property prior to fundraising? Check out this post.)
First take some lessons from the successful state crowdfunding campaigns that have taken place in the more than thirty states with intrastate legislation. Last month at Phoenix Startup Week, Arizona Representative Jeff Weninger, sponsor of the Arizona crowdfunding law, let me know that a Tucson brewery will be the first Arizona company to use the exemption that allows crowdfunding within states.
Next, some words of wisdom from the crowd of professionals who have supported the JOBS Act:
Brian J. Burt, business lawyer in Phoenix with Snell & Wilmer, starts us with the need for the story: “Title III crowdfunding has the power to democratize the funding process and give millions of aspiring entrepreneurs access to the capital required to start and grow their companies. To harness that power, an entrepreneur will need to offer a compelling story as to why their idea deserves to be funded—a story that goes well beyond a promised return on investment.”
A few cautionary words from attorney Anthony Zeoli: “I absolutely support the idea of retail crowdfunding, but I think the final Title III rules fall well short of making it a viable capital raising option. A retail crowdfunding offering technically could work under the final rules but there are simply easier, cheaper, and/or more useful methods for accomplishing the same funding goals (such as available intrastate regulations). For that reason, I just do not see Title III retail crowdfunding, in its current form, being a particularly attractive capital raising option.”
Victoria Silchenko, founder of Metropole Capital Group, provides this message to founders: “Focus on your revenue model and practice integrity. Money only comes to those who can be trusted with it.”
Scott Purcell of FundAmerica is a huge fan of Title III and has an interesting take on the type of Title III that may be used: “Even though the final rules are flawed to the point where major investors are excluded from participating due to the low max-caps. Small- to mid-sized businesses, from dentist offices to machine shops to warehouse companies, will now be able to get the funding (primarily debt, not equity) they need to grow and create jobs.”
Alon Hillel-Tuch, founder, CFO, and CTO of RocketHub, provided the following tips, which identify the simultaneous need for planning and action. But he advises to “think long and hard about who you want investing in your business, [because] money alone won’t help you succeed.”
Communication is key.
Unlike with a traditional, rewards-based fundraising campaign, you are asking people to directly invest in your business. While you may have great instincts on how you want to run your business, it is critical that you are able to articulate your vision and business clearly and passionately . Make sure you have your materials and sound-bites ready!
Know which world you’re trying to be in.
Are you looking to become the next billion-dollar company (seriously reflect on the unlikeliness of this)? Or are you trying to create a fantastic small-business? Each world comes with its own risks and returns. Understand these worlds!
Understand what raising investment funds mean.
It could affect how much of your business you own—now and in the future.There are a lot of different ways to raise funds; make sure you understand the choice you are making and what it means for you and those who invest in you
Make sure you prime the pump.
Don’t jump the gun and start soliciting, but do have a sense of who you want to reach out to first. When you are ready to go, and your offering is live, approach those who believe in you and want to invest in your endeavor. This helps set the tone and boost your confidence in the process
Another industry pioneer Ruth E Hedges, creator of Crowdfunding CRM, expands on the prime-the-pump mindset: “ You and your business will need to attract followers, fans, and positive awareness. Remember that your crowd will become your community, your advocates, and your promoters. Give them something of value to identify with. This is not ‘If you build it, they will come,’ but more like ‘If a tree falls in the forest and no one hears it, does it make a sound?’ In this sense, you’ll need to make a lot of carefully calibrated noises in the presence of many receptive people.”
Dara Albright, co-founder of the FinFair Conference and LendIt conference, cautions entrepreneurs to not only be prepared but also manage expectations: “My tip for Title III issuers as they commence their offering would be to go into this with low expectations. Unfortunately, the markets have changed significantly since the JOBS Act was signed into law in April 2012. With NASDAQ already down nearly 15% in the first few weeks of 2016 and the IPO market drying up, there is a lot less enthusiasm for highly risky startup investing. In this challenging environment, it becomes essential that issuers work with quality platforms and experienced investment professionals that can provide not only guidance but introductions to supplemental offline capital sources. I also would suggest that issuers get creative with their crowd-finance offering by structuring an offering that include additional perks and dividends that can offset investor risk. Title III issuers should consider hybrid offerings that encompass rewards-based mechanisms or perhaps future revenue-share structures. Unfortunately, for issuers, straight equity deals are going to be difficult to get done.”
The final rules start by stating the objective of Title III as “…crowdfunding provisions of the JOBS Act were intended to help provide startups and small businesses with capital by making relatively low dollar offerings of securities, featuring relatively low dollar investments by the ‘crowd,’ less costly.” Get started as soon as possible on your business plan and financials to make Title III more than just legitimizing friends’ and family’s investments.