How to Attract Crowdfunding Investors Without Breaking the Law
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As the potential returns from crowdfunding go beyond free T-Shirts and movie passes, the rules were bound to get more complex.
Last week, President Barack Obama signed into law the Jumpstart Our Business Startups Act, or JOBS Act. Though the law contains many parts that could free up funds for startups, the most anticipated measure among the entrepreneurial set is the crowdfunding provision that legalizes investing in startups by non-accredited investors.
Formerly, only accredited investors -- typically wealthy individuals who can afford to make riskier bets -- could invest in pre-IPO companies.
Though the prospect of being able to raise money from a bigger pool of investors is giving many entrepreneurs reason to salivate these days, the law stands to add a new level of complexity in the way companies market themselves to investors using crowdfunding.
Among other things, the JOBS Act requires websites that offer crowdfunding services to register with the Securities and Exchange Commission as a broker or a "funding portal." Those promoting a company that's raising funds must reveal their relationship. And firms attempting to attract investor dollars must file with the SEC and provide investors annual reports of financial conditions and operating results.
Related: The JOBS Act: What You Need To Know
What's more, other stipulations may surface in the next few months as the SEC must set the procedures for how the law will be implemented in nine months' time, says Jason Best, the founder of the Startup Exemption, a San Francisco-based site dedicated to providing information about the crowdfunding provision.
So how do you go about attracting crowdfunding investors without running afoul of the new law? Here are four tips:
Just as before, possibly the key element in finding success on crowdfunding sites is marketing. By spreading the message about your company far and wide, you'll improve your chances of getting heard -- and landing funding.
But that doesn't mean you should plaster your company's name on billboards. Even for small-time investors, professionalism, branding, quality of a company's connections and its digital footprint will be critical.
Though you can be as chatty as you ever were on crowdfunding sites, get ready for a bit more litigious behavior. While you can spread the word about your company and its funding goals, you won't be able to list the terms of your offering outside of the accredited crowdfunding sites, says Matt Lyons, a partner at the Austin, Texas, branch of Andrews Kurth, a law firm that specializes in corporate and securities law for emerging-growth companies. Nor can you make "misstatements and omissions" about your company without being held liable. The punishment can include fines or even jail time, in extreme cases. To avoid this fate, don't cite the terms of your offer and overstating your results, as you're Tweeting or Facebooking all the glories that is your startup.
Polish your look.
In the past, most startups' seed funding came from friends, family or community angel groups who knew the company's leadership. Crowdfunding changes this as potential investors will now be doing most of their vetting online. Being an unknown entity means, everything about your online presence has to be polished, professional and set to impress.
Investors will certainly inspect your online profiles and report back to the group, a process known as "collective due diligence." And because the law states that no funds will be released until the deal is fully funded, companies need to be especially careful during a raise.
If you have a large number of risqué or controversial pictures or posts, for instance, take them down, says Michael Faulkner founder of Seedups.com, a Northern Ireland-based crowdfunding platform that has accredited investors as members. "Social Media can act as a form of validation for most of the startups," Faulkner says. Consider a digital "spring-cleaning" effort, before raising funds, he suggests. Remember, when in doubt, leave it out.
For crowdfunding companies, credibility is going to be key. As investors start evaluating unknown companies, they'll be looking at your financial strength -- which places a greater emphasis on the financial documents you make available. You'll need to provide statements of current and projected financial conditions, as well as a statement about your company's risks.
Further, the quality and quantity of third-party mentions will matter infinitely more than they do now. Every positive press mention you receive is one more piece of validation for your company, making a crowdfunding company's public-relations campaigns more important than ever.