Social networking comes to finance
Crowdfunding may be a big disruptor. The arcane world of Wall Street and the City of London have kept a tight grip on world of finance for so long and has become so incestuous and expensive (in the US, the legal fees alone for a ‘direct public offering’ could run to $100,000), it is no surprise that people who want to start an enterprise are finding many ways to side-step them. Crowdfunding, sometimes called crowdfinance or crowdsourced capital, is in the process of reinventing finance $100 at a time.
By 2025, the global crowdfunding market could reach between $90 billion and $96 billion — roughly 1.8 times the size of the global venture capital industry today, according to a 2013 study commissioned by the World Bank.
Rather than imagining that you can develop a fat business plan to convince a single investor, crowdfunding allows you to pitch to a large number of people simultaneously and get small dollops of investment that can add up to the amount you seek.But there are some limitations.
There are six types of platforms:
- equity: direct investment, by accredited investors;
- lending: mainly peer-t0-peer;
- rewards: the kind you probably know, like kickstarter and indiegogo;
- donation: mainly for charitable purposes;
- micro-loans: lending to disadvantaged people round the world;
- direct public offerings: that require a manager.
Growth of Crowdfunding
Last year, 308 crowdfunding platforms across the world raised $2.7 billion, an 81 percent increase over the amount raised in 2011, according to the annual report released today from the Los Angeles based research firm, Massolution. The growth in 2012 represents an acceleration, up from 64 percent growth in 2011. Looking ahead, growth is expected to reach $5.1 billion raised in 2013, representing an expected 89 percent increase in the dollars raised, the report predicts
Obama led the way: As lawyer Tom Kappel from Nashville wrote in a law review article, “Barack Obama’s campaign raised nearly three-quarters of a billion dollars largely in small amounts over the Internet. The campaign’s ability to mobilize and monetize supporters using the Internet is often cited by pundits of all political stripes as a principal factor in Obama’s victory. If nothing else, Obama’s fundraising figures are evidence of people’s willingness to give financial support to someone they believe in—sometimes referred to as ‘crowdfunding’.”
Loan Guarantee Fund: IndieGoGo (see below) is supporting a loan guarantee fund (like the loan guarantee fund of the SBA) for small crowdfunded businesses. The money will be used as a guarantee for a loan to an entrepreneur selected by his/her peers. The Entrepreneur Commons Mutual Guarantee Fund is a project of Community Ventures, a 501(c)3 nonprofit organization.
Kiva microfinance: I am a huge fan of Kiva, the P2P micro-lender and will soon have made my 100th loan to microfinance individuals and small teams, largely in the developing world. It has used the Internet to connect small businesses in the Third World with philanthropically minded lenders in the First World. Only five years old, $74,235,600 in loans were posted on Kiva in 2010–in 54 countries.
Crowdsourcing is itself and really rampant phenomenon now. It makes good sense when you are wanting to share your story. Or have others share theirs with you. Or both of you wanting to pool resources to some extent. So it’s not surprising that crowdsourcing is being used to get ideas, offer services, find skills–and in this case, find money. The best way into understanding crowdsourcing is to read Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business.
In the innovations field, probably the best known example of crowdsourcing is InnoCentive. It’s a place where organizations—corporations, large and small, not-for-profits and governments—turn when they have important problems that need solving. Their expertise is in Open Innovation (OI). They help expand companies’ innovation capabilities by building a more collaborative approach to problem solving, and providing the means to tap into the best minds within the company as well as creative problem solvers throughout the world.
A really interesting experiment has been mounted in Washington State: a group of East Jefferson County, Washington, citizens who are interested in facilitating financial investments to help local businesses and individuals has formed a Local Investing Opportunities Network, or LION. LION creates opportunities for local individuals and businesses to connect with local investors to build prosperous local businesses, keep investing money in our community, and help build a more resilient and sustainable economy in East Jefferson County.
LION is not a bank, lending institution, or financial consultant. In effect it’s a form of crowdfunding and its membership consists of local citizens who want to invest their money locally, thereby putting their investing money to work within our community. Keeping funds local facilitates greater economic self-sufficiency, job growth, economic development, and a dollar-multiplier effect whereby a dollar kept within the community can be spent many times over for a far greater benefit than a dollar invested away from our community.
Raising finance meets brand marketing
One of the advantages of raising money for your business through crowdfunding is that it provides the opportunity to engage customers, prospective customers as well as just plain friends, family and fans directly. If you tell people on your mailing list (from the SEC perspective, they have to be people you know–though the word ‘know’ is open for discussion) about your pitch, you may be surprised at how they will want to engage with you.
Thus you can raise money and promote your brand at the same time. Supporters will find it easier to commit small amounts of money, especially if you make it easy, for example by paying them back through revenue sharing in place of dividends or interest. In that way, once the business is up and running and making sales, they get paid out on a regular basis–monthly for example.
If you want to understand more about crowdfunding, then I highly recommend The Crowdfunding Revolution: Social Networking Meets Venture Financing. Also high on my list of recommendations is crowdfundingdrs.com–a bookmarking site on crowdfunding run by Dr Deb DiBiasie. Why–because it is jam-packed with crowding funding stories that are easily accessed; from her site you can step off in all kinds of directions and above all, learn a great deal. Don’t miss it.
The point about the marrying of finance and marketing is that it is entirely in your interest, whether you are raising fuinance or not, to develop a wide circle of relationships in connection with your venture.
Crowdfunding is coming center stage. I recommend it to anyone who needs seed money to start their business. I am sure there will be more books appearing, but right now the only one is The Crowdfunding Revolution: Social Networking Meets Venture Financing by Kevin Lawton and Dan Marom, who self-published it.
Crowdfunding has arisen in part, as a natural consequence of social networking, and in part to fill a void in seed money raising not filled by the traditional banking and finance world.
Crowdfunding first; loan and equity later
If you use your own money, coupled with crowdfinance to get off the ground, your business will be much more convincing to bankers and investors later.
Let’s assume that you put in $5,000 of your own funds and raise another $5,000 from 20 members of your ‘crowd’ who each put in $250. Then you get going and make sales of $5,000 a month. Now lets assume you were prepared to offer a royalty on sales that would have amounted to 10% on lenders’ loans had the money been put up on that basis.
Your ‘crowdbackers’ would each get paid out about $2 a month (10% on $250 over a year is $25 ÷ 12 months = $2.08). In this way you would be paying out just over $40 a month on your sales of $5,000 and so the royalty you’d be paying would be just about 1%. This could be easily managed.
- Now that sales would be going well, an approach to a bank for a loan or an investor for equity would be doubly convincing because your business is generating enough revenue to pay back the loan and grow the business value;
- trusted by 20 people who are already getting a return on their money.
If you are going to do it on a simple basis with just a handful of friends, then make sure you use a formal promissory note vehicle to protect both parties and the relationship between them. On my Bootstrap Finance page, you will find plenty of routes to doing that in a straightforward way.
Cutting Edge Capital–a new approach
Cutting Edge Capital is a new approach to funding that helps ventures and organizations to raise moeny in creative ways through Fan-Based Funding; Cooperatives; Direct Private Offerings; Grants and Public Private Partnerships; Direct Public Offering. Their basic philosophy is based on the idea that there is no reason why a venture should go for the 4% of funding that is available through private equity, when they could have access to 96% that ius available through public equity.
Cutting Edge Capital provides small and mid-sized businesses with the information, tools, and expertise they need to raise capital in a way that fits with their unique business model and long-term goals. As experienced business lawyers, entrepreneurs, and finance experts, the CEC team has identified capital raising strategies that allow businesses to solicit non-traditional sources of funding. In addition to being a great way to raise capital, these strategies allow businesses to build public support and recognition at the same time they are raising funds.
Before you read much further, you may want to see the advice of Cutting Edge published on their blog: Capital on Tax on Money Raised Through Crowdfunding.
Crowdfunding for Social Enterprise
Cooperation in Action Crowd Funding raises money for businesses and projects that prioritizes social responsibility, and organizations using cooperation to achieve shared goals.
If these practices are already building blocks of your business plan, then Coop.org is the place for you. Their crowd funding model is unique because it allows users to promote not just a project, but an entire business. Their audience is interested in businesses and projects that include social responsibility, sustainability or some form of collaboration, not just a new clothing label or technological gadget.
In it’s early stages, this platform will grow and you could be part of its success.
There are different opinions as to whether crowdfunding will replace angel investing and venture capital. On balance probably not, but there are nonetheless deep changes in the way that startups are looking for pre-seed and startup funding.
A development that seems to be particularly significant is AngelList–a community of startups and (over 1,000) investors who make fund-raising efficient, by direct matching. To see what users think about, the reviews are well worth reading and following up. Here’s how AngelList works:
- First, you create a startup profile and pick which investors can see your startup. If your profile isn’t ready to share with investors, just pick zero investors. You can update your profile and investors anytime.
- Every investor on AngelList sees 10-20 new startups in their feed every day. Plus they have their own non-AngelList dealflow. So you may get a few intros this way and they’re working on ways to increase the rate of these spontaneous intros.
This kind of social networking is dynamic and the founders are changing the way the system works almost every day. By the time you read this, things may well have moved on.
AngelList is not alone.
Take a look at these, too:
- circleup: for consumer product and retail company fundraising;
- crowdfunder: connects entrepreneurs with investors;
- earlyshares: investment in private companies, real estate projects, and investment funds;
- equitynet: has operated their business crowdfunding platform since 2005;
- fundable: claims to be the largest business crowdfunding platform dedicated exclusively to helping companies raise capital;
- gust: funding platform for the sourcing and management of early-stage investments;
- microventures: a platform that gives both accredited and non-accredited investors access to invest in startups;
- onevest: in 2014, CoFoundersLab, the startup team-building platform, merged with RockThePost, an equity crowdfunding platform;
- startupvalley: tech startup funding;
- wefunder: provides the opportunity to invest as little as $100 in startups.
Crowdfunding Meets Banking
The basic idea of crowdsourcing led to crowdfunding, but it now seems also to be moving into banking. Imagine the banking revolution that could result. Take a look at Civilized Money that uses people-to-people networks to create an ethical, transparent alternative to the existing financial services industry. No gambling with your money, no fractional reserve lending, no monster bonuses. It’s banking with people, not banks. Eventually Civilised Money will offer all the services that you currently associate with traditional banks, and some you don’t. You’ll be able to choose what happens with your money, whether you participate in lending, borrowing, investing, donating, fundraising or transacting.
You can set up a crowdfunding site, too
Another option is crowdvalley.com was founded by Alessandro Ravanetti whose aim is to provide the infrastructure for the new, democratic crowdfunding market and for those looking to create more effective and transparent financial models in a new online investment scenario which is fundamentally different and requires new underlying infrastructure with back office and social components. Another is the ‘white label’ crowdfunding site, Launcht that offers a customizable crowdfunding platform that organizations and institutions can use to power their own branded crowdfunding.
There is a fast growing list of crowdfunding sites in many industrialized countries. Each has its own particular slant and limits to the amounts that can be raised or means of repayment/rewards to lenders. The formula used by each one is different and there are differences by country, too. In the US the SEC regulates the field, but other countries are more permissive, or risky, depending upon how you see it. A crowd of crowdfunders are shown here and more are being added, almost daily.
Check before you post, if you’re an entrepreneur and before you pay, if you’re an investor, by going to crowdcheck that helps entrepreneurs seeking crowdfunding and people interested in making crowdfunding investments.
One of the most exciting (sounding) equity-based crowd funding platforms is earlyshares.com that will be fully operational once the law permits. Their platform not only allows entrepreneurs to get funding for new ideas, but also obtain funding to expand existing companies into larger enterprises…
eRaise has created a crowdfunding marketplace, providing the next generation of socialized business investing. eRaise is a dynamic crowdfunding platform, built to meet the unique capital and networking needs of entrepreneurs, businesses, and investors.
SeedUps: SeedUps aims to plug the funding gap for early stage start-up companies raising up to $250k and allows you to gain access to a growing pool of investors, while getting a fair equity valuation and secure seed funding in your idea. You pay a low transaction fee only if funded, with follow-on growth funding. SeedUps was set up by Michael Faulkner, initially in the UK and Ireland, Seed Ups has now arrived in the US. He says, “After months of preparation and following the set up of an office in Silicon Valley, we’re really looking forward to working with tech start-ups in the US.”
Kickstarter: A fast-growing social funding site is Kickstarter. It is for creative projects rather than people starting a business as such, but some creative projects are businesses, too. Creatives pitch their idea and backers make bids to support them. An example business startup is Vere Sandal. Take a look at their pitch on Kickstarter. The bidders generally get something back–either product, kudos or prizes.
A crowdfunding platform for accredited investors: FundersClub is a new type of venture capital platform, built around a unique online marketplace that allows accredited investors to become equity holders in FundersClub-managed venture funds – which then fund pre-screened, private companies. The platform combines industry-standard venture funds, with an easy-to-use web-platform that allows members to browse and screen fund investment opportunities, view investment profiles and sign legal documents. The result – deserving companies get the capital they need, and investors get unprecedented access to the opportunities they want and the ability to build a diversified portfolio. FundersClub publishes the very interesting ‘Venture News‘.
SoMo connects business borrowers seeking loans with investors looking to make a return on investment, doing well by doing good. SoMo is the first of its kind in many ways as a fully transparent portal that allows investors to look into the eyes of business borrowers in their own neighborhood before making any lending decisions.
Return on Change: RoC was created to catalyze the change that large corporate organizations could not provide. Utlizing the recent signing of the JOBS Act their mission is to provide an online medium by which start-up companies and bright entrepreneurs will be able to pool capital through crowd sourcing, while creating a community of advice and collaboration.
Rockethub: Another very similar site to KickStarter is RocketHub. Describing themselves as a grass roots crowdfunding site, Rockethub’s focus is again within the creative arts, with the two audiences for the site split into ‘Fuelers’ – those providing financial assistance to cool projects, and ‘Creatives’ – those coming up with the concepts, artwork and music and in need of funding. RocketHub calls itself a community for Creatives by Creatives and as a purely indie outfit, not backed by any venture or corporate money. RocketHub is accountable to the user, they say, not bankers or the old guard.
Arctic Island: Arctic Island is a small business funding platform based in San Francisco is preparing to launch.
Venture Bonsai: Based in Helsinki, Venture Bonsai is a crowdfunding service for European startups looking for funding (direct investments) less than € 1m. Venture Bonsai enables entrepreneurs building what it calls online trust in order to attract investors as well as facilitates the whole investment process. The tools and processes offered include for example building the trust network, using the standardized documents and making a vendor due diligence and have it verified.
PeerBackers: It is an online funding platform that allows business owners to raise capital from their “peers”—in small increments—in exchange for tangible rewards to those who contribute. Peerbackers is led by two founders – Sally Outlaw and Andrew Rachmell, who have partnered in the past to create and produce The Next Wave with Leonard Nimoy, a television series airing on CNBC, devoted to exploring innovative technologies for both start-ups and existing companies. Peerbackers is for raising smaller sums and payback is both in kind and towards the cost of what’s being sold.
Growvc: Growvc calls itself the Virtual Silicon Valley. Bringing a global, transparent, community-based approach to seed-funding, Grow VC can help startups secure initial funding of up to $1M US for their businesses. Grow VC will not only connect startup entrepreneurs with investors to help them discover common interests, but also provide tools for processes and transparent, new ways of doing things. Grow VC International headquarters is located in Hong Kong, with offices in the UK and Finland.
Enviu: Enviu develops innovative solutions to environmental and social issues and introduces these to the market. We collaborate with a large group of young entrepreneurial people, senior executives, corporate partners and universities to co-create these innovative businesses.
Funding Circle: An online marketplace where people can lend directly to small businesses in the UK, Funding Circle eliminates the high cost and complexity of banks. People get higher, stable returns for the long term, businesses get lower cost finance to expand and develop. They trust this simple idea makes an easy to use website that hope can have a big impact. Lenders can earn annual returns estimated at 6 – 9%. Borrowers pay lenders a fixed amount each month which includes interest and a repayment amount. Loans last for 1 or 3 years.
LendFriend: here is another site where you can organize lending from friends and family. LendFriend was founded by entrepreneurs who have had loans with friends and family. We’ve purchased our first computer with a loan from grandparents, invested in a friend to fund their first company, and helped a sister consolidate debt. By default, our Loan Management Tool is entirely free. It maintains an online record of the terms of your loan and its projected repayment schedule for your personal reference. Additionally, borrowers will receive email reminders when payments are due to their loan partners. However, if you prefer more financial security, you can also add a legally binding agreement – a Promissory Note – to your loan for a fee. LendFriend will automatically draft your selected loan terms into this document.
Raise Capital: A sort of selective Craigslist for funding, RaiseCapital allows people with business ideas to post text, photos, and videos about their projects to attract some money. That kind of funding is helpful at a time when bank loans are hard to get. Entrepreneurs can log in after paying a one-time $99 fee, and they receive a unique URL on the site as well as a visit counter to track how many people have viewed their posts. The network of investors who are interested in a particular category receive a daily update showing all the new businesses registered the day before. RaiseCapitalTV.com features new businesses in a video presentation. Charities and nonprofits are allowed to post for funding, as well.
Crowdfunder is based in Los Angeles, and is a Business Crowdfunding platform that will enable U.S. startups and small businesses to raise funds by selling equity, debt, and revenue-based securities to investors online. They also intend to provide a robust entrepreneurial and investor community to help companies locate resources in addition to funding, including free education and guidance in all matters relating to entrepreneurship.
Innovatrs: is an international, crowdsourced partnering platform. Innovatrs source the world’s most innovative entrepreneurs so people can partner with or invest in them. Innovation officers, business development or partnership directors and investors use Innovatrs to efficiently discover the most relevant entrepreneurs and ideas.
FundaBrand: FundaBrand is the trading name of Crowd Source Capital Limited and is a crowd sourced funding platform where project owners can showcase their projects and raise funds to start and/or grow their businesses. Based in London, with a California office, FundaBrand offers project owners seeking funding the possibility to raise start up and/or expansion capital from a sale and lease back of their brand whilst still holding onto 100% of their equity. This is yet another variant of crowdfunding that obviates the need for compliance with SEC and equivalent rules in other countries.
CoFundIt: Based in Switzerland, CoFundIt is in Beta and already has raised quite substantial sums for projects. Members join and seek funding by making pitches in which they can have links to products or websites. The English language of the site may lead to questions.
Start Something Good: social enterprise is burgeoning–StartSomethinGood empowers people from around the world to become social innovators. By connecting social entrepreneurs with the financial and intellectual capital they need to transform an idea for improving the world into a reality, together we can turn ideas into action and impact.
Crowdrise: Like 33needs, Crowdrise is in the non-profit field. Crowdrise is about raising money for charity and having the most fun in the world while doing it. Crowdrise is way more fun than anything else aside from being all nervous about trying to kiss a girl for the first time and her not saying something like ‘you’ve got to be kidding me.’ They call it sponsored volunteerism: simply create a project page on Crowdrise to show the amazing volunteer work you’re doing and then message all your friends and family and ask them to sponsor you. Crowd rise has now purchased GoFundMe, which is more for personal fundraising and charitable ventures.
On Green: OnGreen focuses on business ideas and patents that are a part of the green economy–tries to bring inventors, entrepreneurs, and investors together by creating a “social marketplace” to connect startup businesses with the funding they need and the new technology that might help them move forward
FirstGiving: The purpose of FirstGiving is empowering passionate nonprofit supporters to raise more money than they ever thought possible for the causes they care about.partners with nonprofit organizations to allow them to plan, execute, and measure successful online fundraising campaigns. For individual fundraisers, they aim to make the process simple, effective, and even fun! More than 8,000 non-prfoits have used them, raising over $1bn from 13 million donors. If that fails, try SocialVibe!
Supporter Wall: Supporter Wall gives you the ability to collect donations for any cause or project. Supporters purchase squares on your Supporter Wall. The square then displays their chosen photo and link. As squares are purchased, the proceeds go directly to you.
peerbackers promotes your private offering to investors across the Web through RegDTV and MarketWatch.
Catwalkgenius: On Catwalk Genius, based in UK and Ireland, you can invest in a public-funded fashion collection. You find a brand you love and buy a share for the chance to earn profits and perks. UK and Irish fashion fans can get involved for as little as £11, the price of one share. When the chosen designer makes a new collection with their public investment, supporters share in the revenues from sales.
FashionStake: is another crowd-curated fashion marketplace–FashionStake in based in New York. Along with shopping top emerging designers, you can pre-order exclusive fashion at special prices and vote up your favorite pieces. FashionStake was conceived to bring exclusive fashion from top designers directly to the public, without the large markup, restrictive choice and hassle of traveling to stores.
Indiegogo: Founded in 2008 because there are so many people in this world, with great ideas and big dreams, who are looking for the opportunity to get funding. IndieGoGo offers anyone with an idea – creative, cause-related, or entrepreneurial – the tools to effectively build a campaign and raise money. Read about Emmy’s Organics of Ithica, NY who raised $15K for their business through IndieGoGo.
Pozible: is a new crowdfunding platform and community for creative projects and ideas. Based in Sydney, Australia, Pozible has been developed for artists, musicians, filmmakers, journalists, designers, entrepreneurs, inventors, event organizers, software developers and all other creative’s, to raise funds and give project creators the break they need to realize their goals and aspirations.
SellaBand: Based in Munich and Amsterdam, SellaBand was launched in 2006 and has coordinated recording sessions for 42 artists or acts who had their albums funded by their fans. Over $3,000,000 has been invested in independent bands. Artists retain ownership of the works created and have the flexibility to determine which incentives they will offer their fans who fund them. The funding engine also allows artists the freedom to enter into deals with any label, management company, or publisher and there are no advances to pay back.
fanatic: fanatic.fm is a music sponsorship platform where brands and bands can find each other. Musicians publish a new album with sponsorship from brands. No corporate sell-out – musicians take full control over choosing sponsors.
FansNextDoor: This is a Europe-based platform that empowers creatives into funding their projects, thanks to their fans’ contributions. With FansNextDoor, you submit your project online; you promote it in every way you can (online and offline); you get your funds.
Cofundos: Cofundos helps to realize open-source software ideas, by providing a platform for their discussion & enrichment and by establishing a process for organizing the contributions and interests of different stakeholders in the idea. Cofundos is based at the Department of Business Information Systems at the Institute for Computer Science of Universität Leipzig.
CrowdCube: Based at the University of Exeter in the UK, CrowdCube is unlike many other crowdfunders in that UK-based entrepreneurs offer equity. The founders want to emulate Kickstarters, where they report the tictok venture that raised nearly $1m from 13,000 backers in a matter of weeks.
MicroVenture Marketplace: This is the financial industry’s first organization which merges peer-to-peer lending with the venture capital industry. The Austin, Texas-based MicroVentures also provides an exclusive opportunity for investors: to offer funding resources to entrepreneurs and early-stage organizations that need capital to accelerate company development.
WealthForge: Coming soon WealthForge will open new capital markets to entrepreneurs, while creating new investment opportunities for qualified investors and provide exposure and networking prospects to all users. Entrepreneurs can seek capital funding by showcasing business concepts to a network of accredited investors. Investors can easily view the best new business ideas for funding consideration. There’s also room for General Users who want to contribute services or aide in ventures.
Quirky: You might just find a product of interest on Quirky, but you can submit an idea and have it worked on by the crowd. If it wins, quirky will sell it. You might even find helpful people you’d like to link up with. Most people have earned nothing, but some have earned tens of thousands of dollars.
Starters Fund is now in Beta in Europe. It is owned by SeedFunding International Ltd, a private Limited by shares Liability Company established in Nicosia, Cyprus. The Company belongs to the creators of startersfund.com, as well as enthusiast angel investors who financially supported the project through the early stages. Startersfund.com offers the opportunity for collecting funds through the two most common methods of crowdfunding, combining also a Virtual Business Incubator (VBI), a Business Accelerator and a specialised marketplace, in order to fully support start-up birth, growth and acceleration.
Community Leader is online marketplace linking small private companies and prospective investors into a single intelligent network of managing crowd funding opportunities.
SoMoLend: It allows individuals, banks, local governments, business associations, chambers of commerce and municipalities can invest in small businesses by use of a safe, secure, easy-to-use platform.
StartupValley, aka Startups in Silicon Valley or “The Valley”, is currently in Beta while the regulations are being finalized by the SEC. But in early 2013, once these rules are published, StartupValley will be a full functioning portal that will allow tech startups and businesses to raise capital for their company through the power of the crowd. Non-accredited investors will be able to provide early-stage investments in these tech-based businesses in exchange for an equity share in their company.
Rock the Post: is a crowdfunding website designed to fund small businesses, entrepreneurs, and nonprofits. It is the ideal tool for entrepreneurs to leverage networks, reach out to new contacts, and fill in the missing pieces of their projects. Rock the Post provides budding businesses with the means necessary to amass resources and flourish.
TEN—Texas Funding: provides a platform for the equity funding of Texas-based startups. Actually, it’s more than that, since the parent TEN Capital provides a kind of ladders up through the levels of equity that a company may need as it grows—up to the level of angel investment, which in Texas is done largely through family offices that are private wealth management advisory firms that serve ultra-high-net-worth investors. Once you have shown your suitability for external capital investment, TEN will take you on and guide your business through the rocky path to gaining access to equity capital—for a monthly fee of $295.
SEC Restriction on Equity Crowdfunding
The SEC 502(c) Rule prohibits issuers from general solicitation and general advertising for private placements, but one method of demonstrating that the sale of a security through a private placement is not the result of general advertising or general solicitation is for there to be a “documented substantial and pre-existing relationship” between the issuer and the prospective investor, such as ‘friends and family’. This is a way that crowdfunders can avoid sanction. The interesting thing is that there is no definition of what constitutes a “pre-existing” relationship. “Substantive” means that if the company (or a person acting on its behalf) has reliable knowledge or information regarding the prospective investor it should be sufficient that it can evaluate the investor’s financial circumstances and sophistication.
HR 2930 amends the Securities Act of 1933 to exempt from the prohibitions against use of interstate commerce and the mails for sale or delivery after sale of unregistered securities, including unregistered security-based swaps, any transactions involving the issuance of (crowdfunded) securities for which:
- the aggregate annual amount raised through such issue is $5 million or less; and
- individual investments in the securities are limited to an aggregate annual amount equal to the lesser of $10,000, and 10% of the investor’s annual income.
HR 2930 also authorizes an issuer to rely upon certifications provided by investors. It amends the Securities Exchange Act of 1934 to exclude persons holding crowdfunded securities under this Act from application of “held of record” requirements with respect to mandatory registration of securities. It also amends the Securities Act of 1933 to exempt such crowdfunded securities from state regulation of securities offerings.
Crowdfunding was signed into law on April 5th, 2012. Crowdfunding will make it easier for small businesses and entrepreneurs to obtain much needed access to capital, now that the SEC has finally issued the Rules for Title III (crowdfunding). Companies will be enabled to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period from both accredited and non-accredited investors.