How General Solicitation Works -- Title II of the JOBS Act

Published on Oct 3, 2013          

RCTV Crowdfunding Hangout #4:  Title II Equity & Entrepreneurs

Streamed live on Feb 13, 2014          

Published on Feb 27, 2013          

Published on Mar 15, 2013          

The four typical types of crowdfunding

1. Equity Based Crowdfunding: Investors receive some ownership in the company.
2. Donation Based Crowdfunding: Contributions go towards a charitable cause.
3. Lending Based Crowdfunding: Investors are repaid for their investment over a period of time.
4. Reward Based Crowfunding: Investors receive tangible items or services in return for their funds or In-Kind contributions of goods & services.

In addition, the NMEX Crowdfunding platform allows a type of Crowdfunding for In-Kind Poducts & Services from rewards and donation based contributors, and potential joint venture partners. Through In-Kind Crowdfunding products and services are received rather than money, and it can be just as important to the growth and success of a project or company as monetary contributions, and many times is easier to achieve.

Crowdfunding on NMEX is limited to MarketMaker and Listed Company NMEX subscribers only. One advantage of NMEX Crowdfunding is that the process is free to these Subscribers, and all funds raised by the fundraising entity goes directly to the fundraiser. Additional fees are only applied if the fundraiser employs the assistance of NMEX Business Client Services for some purpose such as extra marketing, legal, or accounting assistance.

The success of any Crowdfunding effort involves many factors including a significant amount of marketing. Fundraisers should not expect to be successful in the heavily competitive Crowdfunding marketplace without significant marketing efforts employed to reach potential contributors.

Setting Up a NMEX Crowd Fund

NMEX Crowdfunds involve a two or three step process, all easily and quickly established. Step One involves setting up the Fund Page. Step Two involves setting up the associated Funding Voucher which contributors will use to contribute funds. Step Three is employed if the fundraiser desires to implement the In-Kind Products & Services type model.

Step One

A.  After registering and logging in, go to the Fund section of the Main Menu and create a Fund which describes the project to be funded in detail. Choose a descriptive Title for the project that will allow easy reference in other documents and marketing. (e.g. The John Smith Movie Fund)
B.  In the description portion of the Fund include a proprietary code of your choice right at the top of the description. This code will be used later in Step Two as a Funding Voucher Code. (e.g. Funding Voucher Code FV123456JS)
C.  Once the Fund Posting is completed, copy or record the URL of the Fund page on NMEX. It will be used in Step Two in the Funding Voucher.
D.  Place the proprietary code in the Tags section of the form.

Step Two

A.  After registering and logging in, go to the Voucher Section of the Main Menu and create a Funding Voucher for the Fund. There are three types of Vouchers generally used on NMEX, Funding Vouchers for Crowdfunding purposes, Discount Vouchers for discounting products and services, and Ticket Vouchers. When naming a Funding Voucher it is important to Name it similarly to the Name of the Fund established in Step One. Also, always identify it as a Funding Voucher. (e.g. Funding Voucher - The John Smith Movie Fund)
B.  In the Discount Field put a "0.0"
C.  In the Price of the Voucher put in a reasonable figure such as "10". This will be the minimum contribution amount and is multiplied by the Number of Vouchers in the Amount of Vouchers Field to give the Total amount of funds you are attempting to raise. Contributors will contribute by purchasing the number of Vouchers equal to their intended contribution.
D.  Contributions on NMEX are done through PayPal unless otherwise noted. PayPal will use the email of the Fund Raiser as registered on NMEX. This email must also be registered with PayPal so that the contribution flows directly to the Fund Raiser. NMEX does not collect and distribute any funds.
E.  Place the URL of the Fund Page from Step One in the Field for the Web Address where the Voucher is to be used.
F.  Place the proprietary code in the Voucher Code field, and in the Tags section of the form.

Step Three (only used for solicitation of In-Kind Products & Services)

A.  After registering and logging in, go to the Contracts Section of the Main Menu and create a Contract for solicitation of Products and Services and/or a Joint Venture Partner(s) needed for the Project. Remember to identify the Contract as a Crowdfunding Contract. (Funding Contract - The John Smith Movie Fund)
B.  Place the proprietary code in the Tags section of the form.

Business Guest Post

It might cost you $39K to crowdfund $100K under the SEC’s new rules

Image Credit: Shutterstock

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January 2, 2014 2:14 PM
<!-- $community_writer: , $contributor_id: --> <!-- byline --> Sherwood Neiss, Crowdfund Capital Advisors

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On October 23, 2013 the Securities and Exchange Commission (SEC) issued the proposed rules for Regulation Crowdfunding.  The 585-pages included an explanation of the rules, the feedback it received, and a cost/benefit analysis.

A cost/benefit analysis is common in many regulations to give the public an estimate of the costs associated with implementing the proposed regulation.  It answers the question, “Do the costs outweigh the benefits?”  For Regulation Crowdfunding it sheds light on the question, “How much will it cost to raise money via crowdfund investing, and how do I keep it to a minimum?” Here’s a closer look at what that analysis tells us.

The Background

The legislation requires that the selling of crowdfund securities take place on registered websites.  The websites hosting the transactions are known as funding portals or broker dealers.  These entities must register with the Securities and Exchange Commission (SEC) and the Financial Intermediary Regulatory Authority (FINRA).  The legislation mandates investors have access to a business plan, use of proceeds, a valuation of the company, and financials. Firm may need to retain a Certified Public Accounting firm to certify the company’s financials or audit the company’s books.  Every step costs money, from completing the required documents to retaining professional services to assist in compliance.

The SEC looked at 3 variables:

a) the success fee (in terms of a percent (%) of proceeds) paid to websites for facilitating the transaction,

b) the compliance cost related to the preparation and filing of individual forms both during and after a campaign, and

c) the costs for a Certified Public Accountant (CPA) review or audit (an expense that scales over $100,000).  Certain costs like the success fee as a percent of the raise are variable, others scale like the CPA/Audit costs for raises over $100,000 and others like the compliance costs are fixed.  The SEC provided both low and high estimates for these costs based on assumptions and surveys it took.

For raises under $100,000, the SEC estimates portal and compliance fees will eat up between 12.9% and 39% of the money raised. For raises over $100,000 but less than $500,000, that figure may drop down to 7.96%.  And for raises over $500,000 but under $1M, it may drop to 7.66%.

For those of you who just want to see a graph, my team at Crowdfund Capital Advisors plotted that below. We decided to stick with industry estimates and make individual calculations for every extra $1,000 in capital sought. This is close to what it looks like:

The Strategy

If you are looking to raise money via crowdfunding, the moral of the story is, try to raise as close to the next threshold as possible. The thresholds are at $100,000, $500,000, and $1M. So if you need to raise $60,000 for your business, aim for $99,000. Not only will you pay less for that money but you will have more of it. Of course, this assumes you will be able to secure $99,000 from backers. Same holds true for the $100,000 to $500,000 levels and over $500,000 level. While this was not the intent of the legislation (to force companies to seek more capital than they need), it may make sense when trying to decrease the cost of raising that money.

The Most Likely Scenario

The proposed rules allow entrepreneurs to do a crowdfund offering to unaccredited investors at the same time they do a private offering to accredited investors. This is called a parallel offering. Entrepreneurs who want product and market validation from the crowd, with more substantial capital (outside of the $1M cap in Regulation Crowdfunding), while skipping the full audit requirements required of raises over $500,000, will most likely do a $499k crowdfunding raise and seek the rest from accredited investors outside of Regulation Crowdfunding.

Sherwood Neiss helped lead the U.S. fight to legalize debt and equity based crowdfunding, coauthored Crowdfund Investing for Dummies and cofounded Crowdfund Capital Advisors, where he provides strategy and technology services to those seeking to benefit from crowdfund investing.

Address of the bookmark: http://venturebeat.com/2014/01/02/it-might-cost-you-39k-to-crowdfund-100k-under-the-secs-new-rules/

Before Facebook paid $2 billion last week to buy Oculus VR, a virtual reality headset maker, 9,500 people donated $2.4 million via Kickstarter, the crowdfunding website, to get Oculus off the ground. Those early donors got thank-you notes, T-shirts or prototype headsets, but not a piece of the company. Donations through Kickstarter are just that, donations, not investments.

Oculus’s success, however, has stoked broad public interest in crowdfunding as a way to invest for profit. Currently, only high-net-worth, high-income investors can legally invest in start-ups through crowdfunding sites. But soon, legislative and regulatory changes will open the sites to everyone.

That is where the Securities and Exchange Commission, with its explicit mission to protect investors, is supposed to come in. But the agency’s proposed crowdfunding rules, to be finalized in the months ahead, are a joke. 

• Crowdfunders of the Maker of Oculus Rift Denounce a Facebook Buyout
  MARCH 26, 2014        

Here’s how this happened. In an election-year sop to special interests, Congress passed a law in 2012 to end or loosen many bedrock investor protections, on the grounds that deregulation would make it easier for companies to raise money. Among its changes, the law, deceptively named the JOBS Act, called for the S.E.C. to write rules to establish a crowdfunding marketplace where companies could raise up to $1 million a year without having to meet disclosure and accounting standards that had long applied whenever private ventures raised money from the public. Perhaps the law’s one and only saving grace was that it also required the S.E.C. to put in place new safeguards against the heightened potential in crowdfunding for big losses from fraudulent or unsuitable offerings.

In the law’s most basic safeguard, Congress instructed the S.E.C. to limit the amount individuals can invest each year through crowdfunding as a way to limit the likely losses on inherently high-risk start-up investments. It gave the S.E.C. leeway to determine that limit, within certain parameters, based on an investor’s income and assets. In its proposal, the agency opted for the most expansive formula possible. For example, a retiree with $25,000 in annual Social Security income and a nest egg of $100,000 would be allowed to invest up to $10,000 a year. That is way too much. If the agency had used the least expansive formula possible, the retiree’s maximum would be $2,000 a year, which is still very risky.

The law also required crowdfunding “intermediaries,” that is, the sites, to take steps to prevent fraud by start-ups featured on the sites. But the S.E.C.’s proposed rules basically let intermediaries satisfy the antifraud obligation by relying on the companies’ own representations.

And under the proposed rules, investors could end up with next to nothing even if they invested in the next big thing. Sophisticated investors often negotiate complex terms to ensure that they are amply rewarded for early-stage investments, even if later investors put up more money. The S.E.C. has acknowledged that everyday investors “might not” be able to negotiate the same terms — which include “anti-dilution provisions,” “superior liquidation preferences” and other arcana. But its proposal only requires companies to disclose how early investments may be “limited, diluted or qualified.” It should instead require that shares issued through crowdfunding incorporate the terms that sophisticated investors routinely demand.

The proposed crowdfunding rules need to be thoroughly reworked. If the five commissioners and their staffs cannot agree on a worthy set of protections, a majority on the commission should refuse to finalize the rules that emerge.

Address of the bookmark: http://www.nytimes.com/2014/03/30/opinion/sunday/how-to-harm-investors.html?_r=0