If you are like most entrepreneurs in search of funding, you have been eagerly anticipating the day when you can utilize crowdfunding techniques to take your venture to the next level. Unfortunately, the Securities Exchange Commission has yet to pass any crowdfunding rules, so for now the beat goes on.
As an entrepreneur, I can sympathize with your funding pains, as I have been in your shoes before. It seems that the general public (friends and family included) love what you are doing and they always want to hear the latest news. More often than not, or hardly ever for that matter, does curiosity convert into dollars that your venture can use to keep the lights on or to launch your first beta test.
Unless these admirers happen to also be venture capitalist or angel investors, it is likely that admirers is all that they will ever be. The fact is, these admirers are not sitting on piles of cash that they set aside for investment or business purposes. The reality is that these admirers may only have enough extra cash to buy your product or maybe an extra few hundred dollars sitting in a brokerage account that they are looking to make a return on. This is what makes crowdfunding so attractive, it is a series of small investments from a lot of people. Five dollars from your neighbor, one thousand from your old college buddy and suddenly we are talking about some real capital. It seems easy enough to put together a campaign and raise the required funds to get you and your startup moving forward, so what is the holdup?
Is it really that easy? As with all things, if it sounds to good to be true, it probably is. The answer depends on what rules are promulgated by the SEC and the resulting red tape that will surely attach to those rules. First and foremost, as with all things investment related, even more so now, there will be extensive disclosure requirements imposed on the business seeking to raise money through the crowdfunding model. I know how much entrepreneurs love playing by the rules, so if you are an entrepreneur entertaining raising money through crowdfunding one day, listen up! Company’s will be required to disclose ownership and capital structure, physical location (perhaps your garage), those individuals that make up their board, business plans, how you plan to spend the money you raise, income tax returns, and everyones favorite, audited financial statements (depending on fund size). You are probably thinking that this does not seem that bad, in fact, a VC firm requires very similar information, but the difference is, you will be filing these disclosures with the SEC and making the information available to various state regulatory agencies. The disclosures will need to be made available to your portal of choice (more on this in a future post), investors, and any other individuals or entities the SEC deems necessary.
Your dream of crowdfunding is slowly becoming fuzzy and proving to be less attractive. As if the reporting requirements are not onerous enough, the JOBS Act, which established crowdfunding as a viable fundraising opportunity, created a new special cause of action against companies that seek to raise funds through online crowdfunding. The cause of action imposes liability for any false (or misleading) statements or omissions made in any oral or written communication to investors. What does this mean for you? If you lie, misrepresent, or fail to disclose any information that a reasonable investor would deem to be necessary in making an investment decision, you will be held accountable and forced to refund the investors money, plus interests. In legal terms, the law creates strict liability against the company, meaning that the wronged investor does not have to prove that the company had any intent to deceive (scienter), nor does the investor need to prove that the company actually caused the investor to lose money. Wow! That’s quite a bit to digest.
I am not painting a picture of doomsday. In fact, once the rules are passed, I predict crowdfunding will take off and be utilized by startups across the country. Sure there will be disclosure requirements and obligations you must comply with, but no one ever said it was going to be easy! You are an entrepreneur, you know that if it were easy, everyone would be doing it and the risk/reward would be more balanced.