What you need to know about crowdfunding

While attending a recent “CrowdFund Texas” event, I was struck by the level of interest for this new platform to raise capital funds. At first look, it’s easy to see why. Companies now have an opportunity to pitch their ideas and investment requests to the world online through dedicated crowdfunding sites, therefore greatly expanding a company’s reach when seeking investment capital. Under terms of recent crowdfunding legislation, without having to first file registration statements, procedures are simplified, cutting time and reducing expenses. There are definitely a few important details to think through before embarking on this path. First, it’s more important than ever to make sure your IP is protected. Your product or idea will be out there for anyone to see, copy and maybe even competitively develop. Second, you likely will have to work through a financial intermediary, or “portal”, to raise funds through crowdfunding. These portals are a brand new concept with new players. Be sure to vet the credentials of anyone you engage and get clarity on the what, where, when and how funds are dispersed to you.

As expected, the process comes at a price, as do the more traditional paths to raising capital. Understand and establish these costs for services and assistance in advance. If you need significant funding, you are likely going to be working hard at this, as the average equity investment is usually less than $50,000 (and maybe one-tenth of that amount when issuing debt). You are also limited to $1M per year in funds raised through crowdfunding. Anyone who has raised $1M in $50k increments can tell you that it is a difficult and time-consuming path, and in the end, you likely will have multiple investors with different expectations to be addressed on an ongoing basis.

It is definitely exciting to see this new path for entrepreneurs to consider. I look forward to seeing the final SEC rules on crowdfunding, expected to be released later this year, and how the process will continue to mature. Spend the time and effort to check with your legal counsel for advice before embarking on this or any fundraising efforts. For more information and common questions regarding crowdfunding, please visit our FAQs page a www.vcfo.com/crowdfunding-faqs.