Judd Hollas, Founder & Chief Inventor, EquityNet
The crowdfunding industry is gaining serious momentum, and with the implementation of Title III of the JOBS Act coming up next year, entrepreneurs will soon have many more options when it comes to fundraising. Title III will allow many Americans who are not considered high-net-worth individuals to invest in private small businesses and startups to own a percentage of those companies. This is going to give entrepreneurs a much larger selection of potential investors than ever before. It’s anticipated that Title III won’t come into effect until sometime next spring, but proactive entrepreneurs can take action now to be prepared to leverage this new law when it gets passed.
1. Assess your need to utilize Title III
Fundraising needs vary depending on a company’s industry and Title III will put certain rules in place that some entrepreneurs may find cumbersome. Under the Title III exemption, funds raised from all types of investors will not be able to exceed $1 million in a 12-month period. This might be suitable for entrepreneurs looking for capital in the six-figure range, but those seeking larger investments will need to be willing to launch multiple fundraising campaigns.
Other equity crowdfunding (ECF) options exist that might be more appropriate for certain entrepreneurs. Type I ECF uses Regulation D exemption 506(b). Type II ECF uses Regulation D exemption 506(c). Both Types I and II allow qualified companies to raise an unlimited amount of capital. Under Type I ECF, however, the offering cannot be publically advertised. Type II ECF allows the offering to be publically advertised, but only accredited investors can participate.
2. Familiarize yourself with the regulation requirements
Entrepreneurs will have to supply the SEC with a significant amount of information in order to participate in Type III ECF (that is, equity crowdfunding under Title III). Some of this information will typically include the intended use of funds raised, the financial history of the company, the professional histories of the management team, and information about owners of the company who represent 20 percent ownership or more.
3. Find the right crowdfunding platform
There are several different types of equity crowdfunding platforms; each with their own capabilities and opportunities for both entrepreneurs and investors. Sites like EquityNet and AngelList are the leading equity crowdfunding platforms based on member population and capabilities. As an entrepreneur, you will need to determine which type of ECF platform best suits your needs. Look for a platform that stands by its policies to protect its members from fraud. You will want to make sure the ECF platform you choose vets its investors. You also want to choose a platform that provides you with an impressive array of fundraising tools, such as EquityNet’s patented business plan and analysis software. Lastly, you want an ECF platform that can provide ancillary services and assistance with your fundraising campaign.
4. Create a great multimedia profile
Your funding profile is the first thing that potential investors see when they log on to a crowdfunding portal, so you want to make sure that it represents your company well and provides enough information about it and your offer to pique their interests and comply with regulations. Nearly all crowdfunding sites have tools that allow entrepreneurs to add, among other things, videos, images, and external links. You stand a much better chance to draw attention to your profile by adding multimedia content.
5. Create a strong business plan
It should be of no surprise that entrepreneurs who take the time to construct a business plan are more likely to achieve funding. (Source here) A great business plan will help you set organizational goals, provide a framework for operations, and attract qualified management and employees while also being a powerful crowdfunding tool. A good plan should include the following:
- Identifying information about the company
- An overview of the company and what it offers
- A description of the business model
- Descriptions of products and services offered
- A description of any intellectual property
- The target markets for the company
- Competition within those markets
- Information about the management of the company
- Financial metrics
- Capitalization information
6. Draw attention to your profile
A great, media-rich funding profile will serve no purpose for you if no one ever sees it. The best way to funnel traffic to your profile is to post links to it throughout the web and through your email. You can use social media outlets like Facebook or Twitter or your own existing website or blog to post these links. It should be noted that you are able to do this currently under Types I and II ECF; however you should also be aware that the SEC only allows you to post links to your funding profile. You cannot provide information about your offering anywhere on the web except for registered crowdfunding portals.
7. Know your audience
Crowdfunding portals offer access to a variety of investors, but the fact is that not all of them will be interested in your company. Different investors will generally want to find deals in their particular fields of interest. For example, an orthopedic surgeon is more likely to be interested in funding a company developing a new type of knee replacement rather than investing in a local seafood restaurant. Know your market, and target investors that express interest in it first. Many investors may state that they are interested in all industries, and they very well could be; however, you don’t want to start with them. Study investors’ profiles and do some homework to discover what they are primarily interested in.
About the Author
Judd Hollas is the founder and chief inventor of EquityNet., which has raised over $210 million in equity crowdfunding and which holds 3 crowdfunding technology patents. EquityNet was one of the first Title II crowdfunding platforms for accredited investors and will soon be adding Title III non-accredited investor capabilities to the site. Judd has more than 20 years of experience as an independent technology analyst and investment manager in the private and public domains.