Considering Crowdfunding For Your Startup? Consider This First…

Signed into law earlier this year, the Jumpstart Our Business Startups (JOBS) Act promises to make capital raising easier for small and emerging growth businesses by loosening important regulatory restrictions on private and public equity offerings.

The “crowdfunding exemption” (one of the most anticipated changes in the law) will allow businesses to raise up to $1 million through social media channels, soliciting small contributions from a wide range of individual investors.

If that sounds like just what you need to take your business to the next level, it might be. But while you’re waiting for the Securities and Exchange Commission to write the crowdfunding rules (they have until the end of the year), consider these notes of caution:

1. Crowdfunding could be expensive:

“To raise up to $1M, companies are going to have to incur substantial expense. For example, if you plan to raise more than $500,000, you will have to have audited financial statements. The cost of obtaining audited financial statements is likely to be a significant percentage of your total fundraising proceeds.” (The Troubles With The New Crowdfunding Law? by Davis Wright Tremaine LLP)

2. Crowdfunding will involve extensive reporting:

“Companies which successfully complete a crowdfunded offering are required to provide investors with annual financial statements for the company. Under each state’s corporate statute, they will also be required to hold annual shareholders meetings, which are likely to be much more elaborate than the traditional small sit-down that angel and venture-funded companies currently hold. Many will need to solicit proxies from a large number of small investors.” (Wishful Thinking About Crowdfunding by Sheehan Phinney Bass + Green PA)

3. Crowdfunding could hurt your ability to raise future funds:

“In addition, startups may want to consider the benefits of raising money as needed in separate stages to avoid equity dilution and also so the startup can raise money at later stages when it may be valued higher. Additional issues include whether being crowdfunded makes a startup less attractive if they seek venture capital funding in the future and whether a company could or would want to seek crowdfunding after traditional venture or angel funding.” (The JOBS Act & Crowdfunding – Is It For You? by Barger & Wolen)

The big picture:

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