WP II, Version 1 (Aug 2012)
Bad Advice and Faulty Assumptions
Raising equity capital directly from unaccredited investors in “the crowd” is not yet legal, and appropriate warnings from the SECand industry voices have cautioned businesses from soliciting investment in accordance with the outline of the JOBS act.Unfortunately, many businesses have been ill-advised to interpret these warnings to mean they must wait to take any actionpertaining to Crowdfunding. This has kept businesses from starting the process of consideration and preparation for aCrowdfunding raise – something that can and should start right now. Although certain rules for Crowdfunding have not yet been ﬁnalized by the SEC – and the actual execution of Crowdfund solicitationfrom investors remains unlawful (for now) – immediate action is the best way a company can position itself to succeed and avoidpotential violations. Furthermore, preparing for a Crowdfunding prepares a company for other ﬁnancial events. Companies need tohave their business affairs in order to obtain bank ﬁnancing, pursue government contracts, raise capital or enter into an exit strategy(such as a merger or acquisition). Therefore, while preparing for a Crowdfunding transaction it is important to prepare for other ﬁnancialtransactions. The “waiting game” many businesses are playing is based on three faulty assumptions:
1) without the complete rules, action of any kind could result in violation; 2) without the complete rules, acting is a waste of resources; and 3) there is no harm inwaiting. Nothing could be further from the truth.
Whether actively considering a Crowdfund raise or not, businesses that fail to makedecisions today within the context of a Crowdfunding future may inadvertently limit their potential access to this capital tomorrow.
Know the Facts
A great deal is already known about the Crowdfunding rules and how this new type of funding will work. Everything indicates thatcompanies planning to Crowdfund, or at least keep the option open, should act now. Below are six “knowns” that demonstrateaction not only can but should be taken now. It is known:
1. What is and isn’t illegal.
Illegal activity and violations can be avoided. It isn’t illegal to prepare your company and position itto act successfully (and immediately) once the complete rules are ﬁnalized. What is illegal is the actual fundraising and/orsolicitation of investors, including distribution of marketing materials referring to the same.
2. An intermediary will be required.
An intermediary will be required by every business seeking Crowdfunding. Theintermediary will conﬁrm the business is properly prepared, ﬁle the opportunity with the SEC, publish the offer to prospectivequaliﬁed investors, and complete the transaction of the security sales. Any business involved in Crowdfunding will be required touse an intermediary.
[see footnote 1]
3. For what isn’t known ﬂexibility can be built in.
Primarily, we do not yet know the speciﬁcs pertaining to scope of the role,responsibilities and requirements of the intermediary (this is an area still under consideration by the SEC and FINRA). We stilldon’t know for sure who will and how they will certify the intermediary, when this certiﬁcation will occur, and what sort of minimum reporting requirements will be involved. We don’t know what business models will be permitted for the intermediariesand what implication this will have on the total cost of raised capital.
[see footnote 2]
4.There will be certain requirements and limitations concerning funding and ﬁnancial health.
Smart decisions can bemade in the context of the future, thereby keeping all options available. This includes limitations on the projected capital raiseand potential investor pool, as well as ﬁnancial reporting and company valuation requirements.
5. Speciﬁc structural elements must be established prior to Crowdfunding,
so we can develop and strengthen theseelements strategically in order to avoid delays and/or denials. The formal structure of a business will affect what type of fundraising can be used and from who funds can be solicited. A company’s legal framework, leadership and track record of governance will be important factors in the approval process for Crowdfunding as well.
6. Best business practices are never a waste of time.
The process of preparing for a Crowdfund raise is 99% basic solidbusiness fundamentals. Preparing now for Crowdfunding is building a stronger business no matter which model of growthcapital you choose. Developing a solid business plan, organizational structure, leadership team, growth plan, ﬁnancialinfrastructure, and a dynamic social media platform will never be a waste of time.
1. An intermediary is referred to as a “funding portal” pursuant to Section 3(a)(80) of the Securities Exchange Act of 1934.2. The intermediary will be under the jurisdiction of the Securities and Exchange Commission and most likely FINRA.