Crowdfunding: How to do it right
Earlier this year, Congress passed, and President Obama signed into law, the JOBS Act, which among other things, legalizes both debt and equity based crowdfunding. Later this year, the SEC is required to promulgate new rules which will allow companies seeking investment capital to use portals similar to IndieGoGo and KickStarter to solicit investments from qualified people.
Obviously, this represents a very exciting opportunity for startups and small businesses, who’ve previously been shut-out of the marketplace for investment funding. This is especially exciting for producers of theatre, film, television and musical entertainment product.
But, even with the relaxed rules expected soon, Crowdfunding in the investment and debt financing space will be much more complicated than in its donation-oriented counterpart.
Preparation is Key
The key to successful crowdfunding is, as in most ventures, preparation. By getting organized now, entrepreneurs planning to crowdfund their projects can get their ducks in a row, and be first to enter this exciting new funding arena.
How to get ready now
Here are a few things you can do now to get ready.
- Form your entity, and structure it properly for the capital structure you are expecting. Having your LLC, Limited Partnership, or Corporation in place, with stock or membership units ready to be issued will put you well ahead of the pack.
- Have a plan. A business plan is absolutely essential to the process of attracting investors. The law requires that companies present business plan, financial statements and disclosure documents to the SEC, but having a comprehensive plan is also just smart business. Just be sure the plan is flexible enough to allow you to adapt to changing market circumstances. Also, care MUST be taken that the content of the plan be complete, and absolutely truthful.
- Hone your pitch. First impressions are all you get in this game. Not just the business plan, but every message you put out there needs to be carefully crafted and designed to move prospective investors closer to a deal. One key advantage of crowdfunding is that you’re able to create multimedia presentations using video, audio, powerpoint, text, and in-person contact to make the deal. Be sure you use these all to your best advantage.
- Get your figures figured out. The law requires that, if you’re raising more than $500,000, you prepare an audited financial statement, so get this started early. Audits (even for brand new companies) aren’t fast. Also, your financial statements need to be realistic. Especially your financial projections. It’s crucial that your financial documents be accurate, complete and that they not omit or misrepresent any material facts. Get good, qualified, professional advice. The valuation process can take a very long time—so get started early.
- Build your network/list. Generally speaking, the most successful crowdfunding projects are those whose principals are able to raise 1/3 or more of their funding through personal networking contacts. Crowds tend to follow crowds, so having your personal network of both online and offline contacts primed and ready to go is crucial. Marketers call this “social proof”. Investors are more likely to invest in projects to which others have also committed.
If you’re planning to get into crowdfunding for your next project, now is the time to get started.
Crowdfunding Boot Camp
One terrific resource is the upcoming Crowdfunding Boot Camp being held in Las Vegas next month. (October 9th and 10th). Participants can walk away from this event with a plan in hand and the resources and connections to make it happen. There will be representatives from all of the major crowdfunding platofms, as well as law firms, accounting firms, VC firms, Angel investor groups, and professional service providers all giving out advice and free services to ensure you are prepared. And, there’ll be a pitch contest with a prize package worth over $10,000.
Save 10%
You can save 10% off the regular admission to CrowdFunding Boot Camp, by visiting https://firemark.com/cfbootcamp and using the promotional code ELU2012 when enrolling. (We receive a small commission for every customer we refer).
Up until earlier this week, it was illegal to promote sales of securities through so-called “general solicitation” if relying on the private offering exemptions of Regulation D. Then, last year, President Obama signed the JOBS Act into law, and the SEC has finally issued the regulations to implement the act. Among the provisions that have now gone into effect, is the new Rule 506(c), which permits a seller of securities to use general solicitation (such as advertising in print or on the internet), to find buyers. The new rule is rather restricted, so it's important to know the rules.