Experts Comment, Offer Tips For Investment Crowdfunding Under New Regs
This post was originally produced for Forbes.
Last fall, the SEC issued long-awaited rules for investment crowdfunding. FINRA also issued its rules. The new rules become effective on May 17, 2016. It’s time for entrepreneurs to start thinking seriously about whether and how to take advantage of the them. I’ve invited three experts to comment and offer suggestions.
Richard Swart, CSO of NextGen Crowdfunding, notes that “Regulation Crowdfunding is far from perfect – but it will allow the first inning of retail equity crowdfunding to begin. Expect legislative changes soon, but at least we now have opportunity for local and community oriented crowdfund investing.”
“The single biggest misconception about Regulation Crowdfunding is that is is somehow an alternative to Venture Capital,” he adds. “Regulation CF will function at the seed round – or as an alternative to debt. Rapidly scaling high-growth potential technology firms are unlikely to use it.”
“Congress made one huge mistake,” he says, referring to the fact that unlike Title IV of the JOBS Act, the new rules issued under Title III don’t allow for entrepreneurs to “test the waters” or solicit expressions of interest in an offering prior to conducting a full offering.
Sara Hanks, CEO and Founder of Crowdcheck, offers a few tips to those considering a crowdfund offering:
Remember that what you are allowed to say about the offering anywhere except on the intermediary’s site is very limited. Know the rules about communications before you start the campaign. Don’t hire communications or PR experts to publicize your campaign unless you know that they know the rules too.
Everything about the offering that appears on the intermediary’s website has to be filed with the SEC, and everything filed with the SEC has to appear on the intermediary’s site. And until the filing has been made, the offering can’t go live on the intermediary’s site.
You will be responsible for “misleading statements.” So no exaggeration, no wild predictions, nothing that you can’t back up with proof. You can say you have the best craft beer on the east coast, but you can’t say you’ll be the next Sam Adams. “Just the facts.”
Sam Guzik, an attorney with Guzik & Associates, also offered three tips for entrepreneurs considering crowdfunding, all focused on helping entrepreneurs choose between rewards (think Kickstarter) versus equity crowdfunding:
Understanding Your Crowdfunding Funding Options – Look Before You Leap! A company which is a candidate for a crowdfunded raise needs to weigh equity crowdfunding versus rewards based crowdfunding. The key difference between these two options is that one makes the crowd an owner of your business, while the other simply provides the crowd with a predetermined reward. But there are many other differences which may not be obvious. Most importantly, equity crowdfunding is heavily regulated by SEC rules. This not only imposes greater upfront costs, such as preparing an SEC compliant disclosure document, but a company which is successful will have ongoing annual reporting obligations as long as the crowdfunded equity remains outstanding. And because equity crowdfunding is regulated, a company which does not dot all of the i’s and cross all of the t’s, as well as its controlling persons (management), could be faced with a legally enforceable demand by the crowd to return their money if they are dissatisfied for any reason.
The Devil is in the Details! Companies which have a good story and a good product, especially those which tap into an affinity group, such as pet lovers, movie fanatics, or a community based enterprise, face a choice: which form of crowdfunding is best for them. Apart from the additional legal costs and reporting obligations which are part and parcel of an equity crowdfunding raise, stringent SEC rules applicable to equity crowdfunding, but not rewards based crowdfunding, could materially impact the likelihood of the success of the crowdfunding campaign. A major consideration is that under equity crowdfunding, with limited exceptions, all of the promotion for the campaign must be conducted on an SEC registered internet portal. Off portal advertising is severely limited, as is promotional activity directed at potential investors before a campaign is listed on a registered portal. A key metric in projecting the success of a crowdfunding campaign in the rewards area has been the ability of a campaign to gain traction – measured by committed dollars – at the very beginning of a campaign. This requires pre-launch marketing, something that is generally prohibited under JOBS Act equity crowdfunding.
Understanding What the Crowd Wants! If your company decides that an equity crowdfunding raise is preferable to a rewards campaign, a company needs to keep in mind that the investing crowd will have different requirements than in a rewards based campaign. If you do not properly recognize and address these concerns before you launch your campaign you may be sorely disappointed. An example: you have invented and built a prototype for the next “world beater” gadget. For the rewards crowd, the questions will be: will it work as advertised, when will it be delivered, and is the product worth the cost? The equity crowd will have other considerations, with a longer time horizon: how strong is the management team, when and how will I be able to profit from my investment (the exit), and are the terms of the equity investment itself fair? An equity crowdfunding company which does not understand and address these factors in their pitch will not succeed in engaging the equity crowd.
On Thursday, February 11, 2016 at 2:00 PM Eastern, Swart, Hanks and Guzik will all join me for a live discussion about the new rules and how entrepreneurs can use them to raise money once they’re effective in May. Tune in here then to watch the interview live. Post questions in the comments below or tweet questions before the interview to @devindthorpe.
More about UC Berkeley:
The University of California was chartered in 1868 and its flagship campus — envisioned as a “City of Learning” — was established at Berkeley, on San Francisco Bay. Today the world’s premier public university and a wellspring of innovation, UC Berkeley occupies a 1,232 acre campus with a sylvan 178-acre central core. From this home its academic community makes key contributions to the economic and social well-being of the Bay Area, California, the nation, and the world.
Richard Swart, courtesy of UC Berkeley
Richard Swart is the Director of Research at the University of California, Berkeley, overseeing research into policies, best practices and innovative social financing models, including effective practices in crowdfunding. Swart is one of the top thought leaders in crowdfunding globally with particular interest in crowdfunding impact and, in crowdfunding practices for corporations who can now leverage crowdfunding as an essential tool for driving innovative ways to strengthen their brand experience, deepen their impact in the community and improve sales.
Current Projects Include:
Launching world’s first Exec Ed course in Corporate Crowdfunding
Researching how small business use alternative finance and Crowdfunding
Building largest data repository for crowdfunding and alternative finance research
Studying how multi-national NGOs and Organizations can empower projects with crowdfunding
Advising Universities on best-practices in crowdfunding
More about CrowdCheck:
CrowdCheck provides due diligence, disclosure and compliance services for online alternative investments, including offerings by early-stage companies, real estate projects and pooled investment vehicles. We protect investors by performing due diligence on the company or project and making sure investors have the information they need to make an informed investment decision. We protect issuers and project sponsors by walking them through the disclosure process to help them comply with the law and avoid liability. We protect online intermediaries by making sure the information presented by issuers and project sponsors on their site is not misleading and complies with the law, and providing related compliance services, such as our “Bad Actor report”. The result of our work usually appears in an easy-to-understand Report that appears on the website of the online intermediary.
Sara Hanks, courtesy of CrowdCheck
Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field. CrowdCheck provides due diligence and compliance services for online alternative securities offerings, helping entrepreneurs and project sponsors through the disclosure and due diligence process and giving investors the information they need to make an informed investment decision and avoid fraud.
Sara’s prior position was General Counsel of the Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). Prior to that, Sara spent many years as a partner of Clifford Chance, one of the world’s largest law firms. While at Clifford Chance, she advised on capital markets transactions and corporate matters for companies throughout the world. Sara began her career with the London law firm Norton Rose. She later joined the Securities and Exchange Commission and as Chief of the Office of International Corporate Finance led the team drafting regulations that put into place a new generation of rules governing the capital-raising process.
Sara received her law degree from Oxford University and is a member of the New York and DC bars and a Solicitor of the Supreme Court of England and Wales. She holds a Series 65 securities license as a registered investment advisor. Sara is an aunt, Army wife, skier, cyclist, gardener and animal lover.
More about Guzik & Associates:
Guzik & Associates, founded by Samuel S. Guzik in 1993 and located in Los Angeles, is a law firm providing a broad spectrum of legal representation in the areas of business, corporate, and securities law. We provide representation to a variety of businesses and individuals in the U.S. and abroad, including start-ups, emerging and established companies, and publicly held NYSE, Nasdaq and OTC listed companies. We also serve as legal counsel to other law firms from time to time on a project or “of counsel” basis.
Samuel Guzik, courtesy of Guzik and Associates
With more than 35 years as a corporate and securities attorney, both in major law firms and in his own firm, Guzik & Associates, Sam Guzik is a nationally recognized thought leader on new capital raising alternatives for startups and SME’s under the JOBS Act of 2012, including Regulation A+ and investment crowdfunding. He is a frequent speaker at academic, government and industry conferences, and a prolific writer on post-JOBS Act issues, including two articles published in 2014 in the Harvard Law Forum and a Senior Contributor to Crowdfund Insider since 2013. He has been widely cited in major financial publications, including The Economist, Forbes and Bloomberg’s Business Week. He has also been actively engaged in the Regulation A+ and Title III crowdfunding rulemaking process, having submitted seven comment letters to the SEC, cited more than 60 times in the SEC’s Final Rules Releases issued in 2015. Mr. Guzik is also former President and Chair of the Crowdfunding Professional Association (CfPA).
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