BASICS FOR INVESTMENT CROWDFUNDING ENTREPRENEURS
To be an ethical and hardworking Entrepreneur is a noble pursuit. Our country has built on such pursuits. The uplift of mankind has been the result of such women and men whose ideas and passion have spurred them to start and grow businesses. The prosperity of the country, and the world, depends upon them. Yet their labors alone cannot businesses build. Capital, preferably invested not borrowed capital, is another essential ingredient for success. And now Crowdfunding—Investment Crowdfunding—provides, finally, a true and new opportunity for all ethical Entrepreneurs, no matter education, sex, age, ethnicity, sexual orientation, or country of origin, to access capital—up to $1 million.
So whether you are an individual just thinking of starting a business and want to raise $50,000 or own or work for a $30 million in sales business that needs up to an additional $1 million in equity or debt, Investment Crowdfunding could be the tool you now need for your business. Early 2013 (probably March or somewhat later—though it could be as early as January) marks the first time since early 1933 such Entrepreneurs across the U.S. (and from outside the U.S. if a U.S. based corporate type entity is used) will have a realistic way to access needed capital from Investors across the fifty states—and beyond. Entrepreneurs will be able to access this capital through what is known as Investment Crowdfunding. The process is relatively inexpensive yet it will involve your time, money, and commitment to successfully pursue it—though without assurance you will be able to raise any of the funds you seek. A whole new Crowdfunding industry is being developed to support your efforts and make it less costly, less risky, and more efficient.
ENTREPRENEURS' FREQUENTLY ASKED QUESTIONS: (scroll down)
IF I OR MY COMPANY HAS AN INTEREST IN CROWDFUNDING, HOW EXACTLY MIGHT I GO ABOUT IT?
Whether you’ve yet to start a business or are an existing business, you’ll need a specific detailed written business plan which describes the business and the market niche, the need for the capital, the plan of operation for the business, and the specific uses for the funds. You will also need any historical financial information for your business as well as a budget and financial forecasts. Once you have your plan, you’ll need to decide how much capital you need, look at how much capital of your own would be prudent to invest, and determine your shortfall. If the amount is $1 million or less, Investment Crowdfunding (which includes both loans and equity investment) is your possible solution. In deciding between debt or equity the concepts of Harvey Firestone (who built Firestone Tire and Rubber from 1 employee to over 20,000 in the early 20th century), that debt should only be used to cover a temporary need, such as a business with predictable seasonality (such as snowplowing) or a business growing very fast and profitably (on paper) which needs to temporarily borrow to meet its expansion needs while going through a process to raise more equity financing.
The North American Securities Administrators Association (comprised of the various securities administrators from the various U.S. states) has recommended to the SEC that the SEC require Entrepreneurs use a form similar to that which you can find at:
These forms (and there are two different, yet similar sets, each set out in a question and answer format and each with an instruction manual) are probably the single best reference for an Entrepreneur trying to now build a business plan in advance of the SEC issuing a draft of its rule. (There are many businesses which provide business plans, many accessible on-line. Many of those intending to have registered funding portals have, or will have, affiliated companies which provide such services (and whose format may be required by the funding portal). If you decide to use one of these (pending SEC rules) each entrepreneur is encouraged to review the forms and manuals referenced above through the NASAA website.
Once you have your basic business plan and forecasts, you’ll need to decide the type of debt or investment you’ll need from Investors and what you’re prepared to pay or give up it. You’ll also need to understand what sort of terms Investors may need, whether the business can afford it, as well as whether it is fair to both Investors and the business alike. Remember, it’s in your own self-interest to ensure that you treat Investors right—you have to raise the money and you may need them or others like them in the future. If you need to raise equity, you’ll have to determine the value of the Company and describe how you arrived at it as well as how you arrived at the offering price of the equity offered. You should also be aware that most business owners believe their business to be worth more than it is shown to be in the event they try to sell it. In the cases of both equity and debt, you’ll have to decide and describe how and when the Investors will see the benefits of their investment in you and your Company. If you lack the skills to determine whether all of this is a worthwhile investment of your own time and money, you’ll need the guidance of financial and other professionals. Realistically, this process could take anywhere from 1 to 9 months or more.
Based upon studies done in the early and late first decade of the 21st century, those Entrepreneurs who spent more time and resources ensuring they had a sound business plan and financial forecasts saw more funding raising success with SCOR offerings (the NASAA offerings permitting companies to raise up to $1 million through a detailed regulatory process) than those who did not.
IF I’M GOING TO GIVE UP EQUITY—OR USE INVESTMENT CROWDFUNDING TO OBTAIN A LOAN (ASSUMING IT IS PERMITTED)--HOW MUCH OF THE EQUITY OF MY COMPANY WILL I HAVE TO OFFER TO INVESTORS?
Each case is different. It depends on your business. Ultimately the market—prospective Investors—will determine whether the amount of equity you are offering is worth the risk of their investment in your Company. Because most Entrepreneurs lack the knowledge and expertise in this area, you should seek advice from a qualified professional. You would be well advised to use a Broker-Dealer, Registered Investment Adviser, and Business Attorney who deals in the area, qualified Valuation Consultant, CPA or other qualified financial adviser permitted to give such advice. A Funding Portal IS NOT, by statute, permitted to provide pricing or other investment advice to Companies for which Investment Crowdfunding is offered on its portal. It is far easier, and probably more accurate, to put a value on a stable existing business than it is upon the value of a yet-to-be formed start-up. With start-ups, it might be that you decide to offer a minimum return to investors provided that the return does not consume more that a specified percentage of the equity. Here, qualified professional help will be most valuable, though registered funding portals and broker-dealers may have short-hand (and less expensive) simple alternatives in the event professional help is too expensive.
OK, ONCE I HAVE MY PLAN, DETERMINED IT REALISTIC, HAVE MY FINANCIAL FORECASTS, AND HAVE DECIDED HOW MUCH OF THE COMPANY I SHOULD PROBABLY GIVE UP, WHAT NEXT?
If you’re going to need to raise between $500,000 and $1,000,000 of debt or equity through Investment Crowdfunding, you’ll need to get a state licensed CPA firm to audit your Company. (If above $100,000 and under $500,000, you’ll need licensed CPA reviewed statements.) This is true whether you have a start-up or a business which has been in existence for three generations. The costs for this audit may run in the few thousands of dollars for a new company with few or no operations to between $20,000 and $60,000 for established businesses with sales in the tens of millions. (CPA reviews will cost substantially less than an audit.) A way for these larger businesses to reduce the audit costs may be for them to form a holding company into which they transfer the operations of the existing business, or set up a subsidiary into which they spin out that line of business which will need the capital; this will require consultation with the Company’s attorney and CPA and will be subject to the final SEC Crowdfunding rules.
BECAUSE INVESTMENT CROWDFUNDING ISN’T LAWFUL IN THE U.S. UNTIL AT LEAST JANUARY 2013 AND THE SEC HAS NOT YET PUBLISHED THE RULES, WHY SHOULD I CARE ABOUT INVESTMENT CROWDFUNDING RIGHT NOW?
Because Investment Crowdfunding is coming and your competitors or potential competitors are going to have it as a financing tool and, perhaps, competitive edge. And if you, as an Entrepreneur of or in a small middle-market firm or smaller, don’t want additional capital—to sustain, to grow, to start—you’re amongst a very small minority. So if you need or will need capital, and feel that Investment Crowdfunding may be a solution for you, there are steps you can and should take now if you are likely to want to use Investment Crowdfunding. Amongst those steps which may be prudent now are:
- Ask yourself these questions: If the answer to any of them is NO, then you should not use Crowdfunding:
- Do you and your business have a high standard of integrity?
- Do you and your business have a good reputation?
- Will friends and family invest in the business under the same terms you’re seeking from others and will your investment structure be fair for all of them?
- Do you and will you have the discipline to run your business like a business and not a piggy-bank for dinners, outings, vacations, and the like?
- Are you prepared to be a good fiduciary to your investors (that is fulfill your duty to be loyal to the company and the investors, be careful and not reckless in running the business, and do your best day-in and day-out) running the business for their benefit (though other factors may be able to be taken into account)?
- Are you prepared to report honestly and frequently to your investors about the good and the bad?
- Are you prepared to have your business go bankrupt, losing all of your and their investment, and potentially losing relationships with friends and family alike?
- Are you prepared to be confronted with lawsuits or governmental investigations if you are accused of fraud or failing to disclose all material information which you could have and should have disclosed had you used a “reasonable investigation”?
- Read the statute on the points dealing with Crowdfunding. www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf. Yes, it’s detailed, and you may not understand everything but after reading it you’ll better understand what’s required.
- Review the SEC Investment Crowdfunding rules. These can be found at www.SEC.gov (to be published in draft form when first issued, probably during the 2012 summer). Also read: www.nasaa.org/13673/nasaa-issues-small-business-advisory-crowdfunding/
- Determine, with the help of trusted advisers, whether Investment Crowdfunding is worth your time and investment. There is no guaranty whatsoever that any investors will even have the slightest interest in investing money in or loaning money to your business. And if they do, you might be surprised that it would be under far different terms than you or your advisers may imagine. For example, many angel investors who invest in private companies do so wanting between a 15 to 25% annual return and with a guaranteed 10% return. Most all businesses and planned businesses in the U.S. could never afford anything close to this.
- Check out some of our Sponsor Members who either are planning to be licensed as Funding Portals as soon as the SEC permits them to be or are Finra registered broker/dealers. They, and our other sponsors, may have information on their websites which you may find useful.
- Consider whether you might instead, or separately, try to raise investment capital from Accredited Investors. Accredited Investors are investors who can be verified to have a net worth, exclusive of their home and related indebtedness, of at least $1 million and annual incomes of $200,000 for each of the past 2 years and expected in the current year (or $300,000 with their spouse [domestic partners in recognized civil union’s will probably qualify). While the Entrepreneur is required to provide all material information about the investment to each Accredited Investor, no particular format is required though timely governmental filings are required. General Solicitation (through the internet and other public sources) will be permitted beginning in the fall of 2012, though verification of Accredited Investor status will be required by the SEC. It is anticipated that this method will usually be used for sums in excess of $1 million. The documentation and process will be easier, but the cost may be higher and chances of raising capital may be less, particularly for start-up businesses and businesses which are not scalable.
- If, after considering all your options, Investment Crowdfunding makes sense to you for your business now or in the future, then we ask you to consider joining the National Crowdfunding Association at this link. The investment is reasonable and we will try to provide additional resources of value to you.