Crowdfunding seems like the ultimate waiting game these days. But despite the SEC’s three-year process to formulate rules to allow it, and our own state’s years of political jockeying
, some folks are trying to keep the funding mechanism top of mind.
They have hope, at least, that intrastate crowdfunding might be allowed in North Carolina this year thanks to Governor Pat McCrory’s bold statements in support of it, and multiple versions of a bill now in play in the current legislative session.
hosted the latest of these events Tuesday morning—panels and speakers shared details of the bills and the rules proposed for crowdfunding lawfully. There were case studies from a trio of entrepreneurs. And NC Commerce Secretary John Skvarla
(pictured above) gave some thoughts about several economic development measures in play
within the state legislature today.
I’ve summed up the comments and thoughts shared Tuesday in “Did you know?” fashion. Check it out, and let us know what other questions you have about crowdfunding. We’ll find the answers.
NC JOBS is now PACES.
And this is a good thing, according to the panelists, some of whom would like to abolish the word crowdfunding. PACES (the leading proposed bill is here
) stands for Providing Access to Capital for Entrepreneurs and Small Businesses. Skvarla believes that including entrepreneurs (presumably of high tech startups) and small businesses helps legislators in both urban and rural communities around the state see impact.
There will be rules.
In order to crowdfund, a big one is that you must satisfy the federal exemption (Rule 147) for intrastate crowdfunding, which requires you pass an 80-80-80 test: 80 percent of revenue must come from within the state, 80 percent of assets must be located in the state and 80 percent of the funds raised must be used to fund operations in the state. The company must also be incorporated in the state (not Delaware), and have its headquarters within. Here’s a great overview of Rule 147 from Cutting Edge Capital. Note: this may preclude many tech startups.
Go it alone, or with help from a portal. But retain a lawyer regardless.
You can crowdfund using a portal like AngelList or FundersClub or EquityNet, or you can take charge yourself. Ward and Smith lawyer Jim Verdonik suggests that crowdfunding is a startup’s first opportunity to be in charge—typically a bank or VC firm or angel sets the terms of any deal. But crowdfunding lets you choose. Pending state and federal approval and rules, there could be numerous ways of doing a crowdfunding campaign. A lawyer will be required to determine the best method.
Regardless, you should have a large network of people to help promote the campaign and contribute to it. That takes a lot of pre-work, and then marketing once live. WedPics CEO Justin Miller
(who recently completed an equity raise
on AngelList) suggests building a list of your brand’s supporters or those interested in watching your growth, and message them monthly about the progress you’re making. That helps prepare you for capital raises of any kind.
Your lawyers may kill you (or cost you a fortune).
The more money you raise using crowdfunding, the larger number of stakeholders you bring into your company, Benji Jones of Smith Anderson points out. And the more investors in the cap table, the more management is required both by you and your lawyers. Determine how sophisticated your investors are—those Jones considers “retail investors” need a lot more hand-holding and communication (about the risks) if they’re engaging in startup investing for the first time. They’re also more likely to sue if things go bad. “Tone down the marketing hype,” Jones advises. “We don’t want you sued.”
Legal fees may be a bit higher when crowdfunding begins, as everyone is trying to navigate new waters. But they’ll drop over time as more campaigns are completed. Other advice for helping out the lawyers and cutting down your fees: educate yourself and write a good business plan.
We have local crowdfunding experts, like the author of this book.
Ward and Smith’s Verdonik will soon publish a book on the subject. In “Capital Raising in a Digital World,” he analyzes the many walls coming down with crowdfunding. The wall between rich and poor—because fundraising is no longer just about who you know. The wall laid in place by the Securities Act of 1933, which determined which companies were public and which were private. The wall between telephone and TV network, which matters because a business person could seek investment via phone call but not TV, and now our phones do both. And the wall between Wall Street and Silicon Valley and Main Street—the prior two no longer hold all the capital.
There will be failures.
Lawyer Mital Patel of Wyrick Robbins compares crowdfunding to the Internet boom in the late 1990s—it’s a paradigm shift. A major goal of crowdfunding is to democratize investing. Today, just 3 percent of 8.6 million accredited investors in the U.S. have made an investment. Crowdfunding opens the floodgates to a practice only a fraction of the population is doing today. There are bound to be mistakes.
Raise money online, but fill out paperwork to do so.
There’s paperwork to attend to and it’ll be different on a state and federal level. Though the federal government hasn’t yet set a filing deadline in its rules, the suggestion is 21 days in advance of selling stock. In North Carolina, the PACES Act calls for 10 days. Additional reporting will be required after a campaign. The federal government suggests quarterly filings.
Be prepared to overshare.
Crowdfunding’s reporting requirements could mean your salary is disclosed. And it’s disclosed as long as your investors still hold stock in the business. This means years of telling the world how much you’re paying yourself. Also required in the filing is the disclosure statement provided to any investor and the names of anyone who owns 10 percent or more of the company.
You can raise $1 million….or $2 million.
What matters is whether your financials have been audited. Audit = $2 million, No audit = $1 million. And you can raise it from as many people as you like as long as it’s not more than $5,000 a person (TBD but this is the suggestion so far). That varies state-to-state—some cap at $10,000, others in the hundreds of dollars. The most up-to-date information can be found on the NC JOBS/PACES Act blog site
There are a lot of success stories.
…At least among the equity crowdfunded sites for accredited investors. AngelList helped 243 startups raise $104 million last year. One of those companies was Raleigh’s WedPics, which closed $250,000 from an AngelList syndicate led by Shark Tank investor Barbara Corcoran. Crowdfunder has more than 83,000 investors on the site, and has made about $150 million worth of deals.
Smaller businesses are using CircleUp to raise money—$30 million has been raised on that platform so far. And we’re all familiar with Kickstarter—it recently hit $1 billion in pledges on the site. Crowdfunding proponents say the track record of these sites bodes well for passage of an intrastate exemption here in North Carolina.
Want to hear more about crowdfunding? The next local event will be hosted by EntreDot March 31 from 5-7 p.m. Details here.