Equity Crowdfunding: What You Need to Know Now
Marianne Hudson, executive director of the Angel Capital Association, talked about the mysteries of the new equity crowdfunding guidelines at Summer in the Sand Aug. 3 at the Sprint Accelerator.
Bottom line: the new market and rules are only a few months old, so some attorneys have advised that it might be wise to wait and watch before jumping in.
A brief history of equity crowdfunding
Equity crowdfunding rules (technically Regulation Crowdfunding) were created by the SEC under the provisions of the JOBS Act of 2012. Regulation Crowdfunding allows any U.S. citizen (not just accredited investors) to invest in companies through a proscribed process. Investors are limited to five to ten percent of annual income or net worth in their total crowdfunding investments in a year. The maximum any investor at any level can invest is $100,000 per year (that’s per investor, not per investment).
A company can raise up to $1 million in equity or debt per year. The fundraising must be done through an approved portal (there are 14) or an approved broker-dealer.
Equity crowdfunding began on May 16, 2016. Since then, 71 companies have registered on the portals, 52 have active fundraising campaigns (have completed a 21-day waiting period) and are asking fora total of $36 million. To date, about $5 million has been raised. Wefunder appears to be the biggest player at this point with 30 campaigns.
The business models for the portals are still being developed. Most charge a fee for listing rather than taking a percentage of the deal. Most offer additional services for a fee.
The most common sectors are:
- Wine and spirits
- Real estate
- Food and beverage
Marianne noted that products that people can touch, feel and easily understand seem to be the best fit for this type of fundraising approach.
The fine print
Marianne noted several challenges associated with equity crowdfunding:
- Expenses may be high. The SEC estimates $35-50K for a $200K raise; $90-190K for a $500K-$1MM raise
- You can do only limited advertising (unlike the typical Kickstarter or Indiegogo crowdfunding campaign). You can say that you are doing an equity crowdfunding campaign, a few basics like how much you are raising, and what portal you are on. All the other information will be on the portal, which is open only to those who register on that portal
- Each investor is listed in the cap table, which can make it challenging to raise money via angel investors or venture capitalists in a later round
- You must file disclosure information with the SEC 21 days before raising funds. The disclosure includes:
- Business plan
- Use of proceeds
- Financial condition (reviewed or audited)
- # of employees
- Price, target size and target date of round
- Ownership and capital structure
- All the material risks
- Annual reports are required
The Angel Capital Association is hosting a webinar to further demystify crowdfunding on Aug. 31, 11 a.m. The session will feature Jackson Mueller of the Milken Institute and Richard Swart of Stanford and NextGen Crowdfunding. The session is free. Register at www.angelcapitalassociation.org/webinars.