Last month President Obama signed the Jumpstart Our Startups Act (JOBS) Act, enabling entrepreneurs to legally fund their businesses through crowdfunding.
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Crowdfunding allows startups to raise small amounts of capital from investors on social media-driven platforms, and requires anyone acting as a “crowdfunding intermediary” to register with the Securities and Exchange Commission. The SEC has until Thanksgiving to establish its final regulatory framework for crowdfunding platforms.
Karen Kerrigan, president of the Small Business & Entrepreneurship Council, said that for small businesses strapped for startup cash, access to fundraising platforms can’t come soon enough. The president’s signing of the JOBS Act has given small businesses a much needed boost of optimism in a lagging recovery, Kerrigan said.
Companies with breakthrough innovations or technology that are able to demonstrate a need, or new voice in the marketplace will be best suited to utilize crowdfunding, Kerrigan said. However, more traditional business models can also make use of this platform for capital.
“Businesses from almost every industry that have an established consumer base and can demonstrate the potential for growth will have a place in these platforms,” she said. “It’s a dynamic marketplace, and any business will be able to benefit.”
However, those who make use of crowdfunding have to be prepared to have multiple owners of their business, she said. Those who invest in the business will have stake in it, and thus more transparency and open conversation will be necessary.
“Also the entrepreneurs who bring their ideas to the marketplace can’t be thin-skinned,” Kerrigan said. “Potential investors will literally be picking apart your idea amongst tons of other potential investments. Be ready for that criticism, and to answer a lot of different questions.”
Although startups and entrepreneurs have about nine months before the SEC issues its final standards for crowdfunding, Nicole Denny, CPA at Kaufman, Rossin, said now is the time to begin preparing to go after it.
First off, Denny said create a business plan that includes numbers for budgeting and prospective growth. Also, include what is proprietary about your business and what would make it a great choice for potential investors. Kerrigan said preparing a business plan and continually updating it, even as much as once per week, will put you in the best position possible for potential investors.
“You should be maintaining records and financial statements and surveying customers and clients,” Kerrigan said. “Also do research on competitors in the marketplace. Take the time to prepare answers to potential questions you receive, and know how you will use the money, if you get it.”
Targets for your fundraising are also key to include, Denny said, because different amounts have different SEC standards. If you plan on raising under $100,000 via crowdfunding, this money is personally certified by the CEO or CFO of the business, so all that is necessary to present to potential investors would be their financial statements or taxes. Raising between $100,000 and $500,000 would mean financial statements would have to be reviewed by a CPA. And finally those businesses looking to raise more than $500,000 -- up to $1 million -- have to have their financial statements audited, Denny said.
Another thing to consider is what you will give your potential investors, both Kerrigan and Denny said. Think about how much equity you are willing to give investors, and consider giving them an exit strategy, Denny said.
“They will want to gain a return, so you may buy them out after a period of time or reach a growth limit,” she said. “Look at how you can make your investors money. That is how they will invest in you.”
Kerrigan said startups should to continue to monitor what is happening in the media in terms of crowdfunding as well, and be prepared to roll with the punches. Sites like WeFunder.com have information for both companies and potential investors on what both parties need to do to make this new law a success. Other private sites are currently in beta testing and will likely roll out after final regulations are issued.
“They are staying flexible so they can adjust and respond to the SEC,” Kerrigan said. “Be realistic when you come to these platforms, and be ready.”