If you’ve been looking to raise money for your business, 2013 could bring some good news: A new form of crowdfunding will allow you to sell equity to members of the public—without going public on a stock exchange.
The Jumpstart Our Business Startups (JOBS) Act that President Obama signed into law this past spring will enable small companies to raise up to $1 million in equity-based financing in a 12 month period from investors, including non-accredited ones, through crowdfunding sites. Once the SEC establishes regulations to put the law into action, it will take effect.
This represents a change from the original form of crowdfunding that you know from sites like Kickstarter. Currently, if an entrepreneur runs a campaign to raise money for a project on a site like this, backers are free to donate, and, in return, they might get input into the business or a small product sample—perhaps some cupcakes from a bakery that was trying to raise funds. But companies cannot use crowdfunding sites to sell equity to the average Joe or Jane.
Right now, no one really knows exactly how crowdfunding will work once the law is implemented. In a a recent Crowdfunding Professionals Association survey, entrepreneurs, investors, and intermediaries assessed their own understanding of how crowdfunding will change under the law—based on a 10 point scale (with 10 being highest amount of expected change)—and nearly 37 percent rated their understanding at a five or less.
Amidst this confusion, it’s important to proceed carefully. Here are some tips on how to start preparing your business today.
Get Professional Advice
Selling equity is a serious legal commitment, so don’t assume you can figure it out on your own. “The biggest thing for entrepreneurs is having attorneys and having accountants that do crowdfunding—and working with them,” says Jilliene Helman, CEO of RealtyMogul, a crowdfunding site for real estate. (RealtyMogul is currently open to accredited investors and operating from Microsoft’s headquarters in Seattle, as a member of the company’s TechStars accelerator.) She also adds that many lawyers and accountants in this niche are publishing guides to raising capital with them that may help you.
Craft a Clear Communication Plan
Entrepreneurs usually find that angel investors and venture capitalists want detailed information on how the business is faring. Even if the investors you attract through crowdfunding are not as financially savvy, it’s reasonable to assume that they, too, will want to know how you’re progressing. To avoid a communications disaster, give some thought to how you will keep in touch with such investors before you raise money.
- Will someone on your team handle communications with investors—or will you hire a publicist or investor relations firm?
- What methods will you use to keep in touch—conference calls, a website, e-mails?
- How will you handle investors’ questions about the business or requests to call you or meet with you?
You should know the answers to these questions before you start your campaign.
“It’s important for entrepreneurs to make sure they are in communication throughout the [capital] raise, and that they are setting expectations before and after the raise,” Helman says.
“The most important thing for setting expectations is under-promising and over-delivering,” Helman adds. While you don’t want to discourage fans from investing, you also don’t want folks to think they’ll be able to cash out in six months if it is realistically going to take three years.
Choose the Right Platform
Each crowdsourced funding site has its own vibe.
Once it’s clear which sites will enable entrepreneurs to sell equity, it will be important to choose one that’s a good fit for your particular company. “Entrepreneurs need to really be aware of the risks and opportunities of each crowdfunding platform,” says Shannon Etnyre, who has frequently advised owners of creative businesses to try crowdfunding as founder of True North Creative Business Planning, located near Boise, Idaho. It’s important to look at the costs of using any platform you choose and how quickly the money you raise will be available, she advises.
Read more articles on crowdfunding.
Elaine Pofeldt is an independent journalist and editorial consultant who specializes in small business, entrepreneurship and careers. A former editor at Fortune Small Business magazine, she has written recently for Fortune, Money, Crain’s New York Business, Working Mother and many other publications. She is co-founder of $200KFreelancer, a community for freelance professionals, and Endhousearrest.com, for homeowners looking to sell.