Traditionally, raising capital as a startup or a small company has been very difficult. Going public can be time-consuming and expensive. Raising capital in private offerings limits the investor pool and angel investors and private equity funds regularly ask for a large percentage of the company in exchange for the risk inherent in investing in a startup or small company. Due to existing federal and state regulation, it was extremely difficult for an investor who was not considered an “accredited investor” to participate in offerings for startups and small companies. For years, startups and small companies had advocated to lawmakers for the legalization of equity crowdfunding. In the past, companies were able to use crowdfunding in their startups where they took in money as either a preorder of a product in development or in exchange for an item such a t-shirt with the company’s logo. On May 16, 2016, Title III of the Jumpstart Our Business Startups (“JOBS”) Act of 2012 (“Regulation Crowdfunding”) came into effect with several caveats, one of the most important being the issuer using Regulation Crowdfunding must offer the securities through an intermediary registered with the Securities and Exchange Commission (the “SEC”), which can be a broker-dealer or a FINRA-regulated funding portal. A list of FINRA-regulated funding portals is here. As of the date of this blog, there are 46 FINRA-regulated funding portals.
With an ever-growing list of options for funding portals, many startups and small companies wonder how to go about selecting the right funding portal for them. Below are several tips to consider when either contemplating whether to raise capital through Regulation Crowdfunding or while selecting a funding portal.
Marketing, Marketing, Marketing
Although Regulation Crowdfunding allows startups and small companies to make offers and sales to all investors, the rules are restrictive as far as the issuer’s ability to advertise the Regulation Crowdfunding offering. The Regulation Crowdfunding rules do not allow for general solicitation and the issuer cannot do much more than direct potential investors to the offering materials on the funding portal that has been engaged by the issuer. This means that, aside from the startup or small company’s own marketing efforts, including a strong social media presence (which are extremely important to having a successful Regulation Crowdfunding offering), the issuer should be aware of which funding platforms have the best marketing which will attract the most potential investors to the funding portal. Recently, the SEC had a symposium during which it was revealed that a very select amount of funding portals have acted as intermediaries for a majority of the money raised in Regulation Crowdfunding offerings.
Build a Relationship
Just like with other aspects of a business, a key to finding the optimal funding portal for the startup or small company’s Regulation Crowdfunding offering is to go through a process of building a relationship. The issuer should speak to as many representatives of the funding portal that are made available to management and, when provided, management should reach out to any references who can share their experiences with the funding portal. If a good working relationship is built with the funding portal, the chances of a satisfactory Regulation Crowdfunding offering improve and the experience is better for management.
Set Expectations
Much of life and business is about setting reasonable expectations so they can be met. During the process of vetting a funding portal for a Regulation Crowdfunding offerings, management of the issuer (with the assistance of legal counsel) should review all materials provided to them by the funding portal so they are aware of the full services that will be provided by the funding portal, including the fees that will be charged. If management of the startup or small business is aware of the level of services that will be provided by the funding portal, the expectations will be accurately set and are more likely to be met or exceeded by the funding portal.
In conclusion, despite the ever-increasing options for funding portals, startups and small companies can ensure the best results and experience by conducting simple due diligence and asking the right questions. Business Legal Advisors, LLC has experience with assisting companies with their Regulation Crowdfunding offerings from start to finish. Contact us today for a free consultation.