Crowdfunding: Why Access to Capital Is Now Easier

Crowdfunding: Why Access to Capital Is Now Easier
August 17 11:24 2016 Print This Article

The SEC’s adoption of new crowdfunding rules could be a game changer for growth companies

On May 16, 2016, the SEC’s final rules on crowdfunding took effect, permitting companies to offer and sell securities through funding portals on the Internet. As of June 20, 2016, the Financial Industry Regulatory Authority (FINRA) is currently regulating eleven SEC-registered crowdfunding portals

For growth-oriented companies, crowdfunding provides another capital raising option while also offering additional options for investors who want to get in on the ground floor of what could be a very successful business. 

Benefits to Companies and Investors

Some of the key benefits of the SEC’s rules permitting crowdfunding or, simply put, the ability of companies to raise capital from the general public through the Internet are listed below.

  • Early stage and growth companies that may be unable or unwilling to raise capital from institutional or private investors have access to another source of capital.
  • By offering and selling equity in their company through the Internet, companies gain a wider distribution of the offering to a larger audience when compared to traditional sources.
  • Using the Internet to offer and sell securities may decrease the cost of capital
  • Non-accredited individual investors, previously excluded from equity crowdfunding investments, are now invited to become investors with certain limitations.
  • Investors have a level of protection since companies raising capital through crowdfunding are required to utilize funding portals or registered broker dealers and have certain disclosure requirements to investors. Additionally, funding portals that wish to participate in the crowdfunding process as an intermediary are required to register with the SEC and become a member of FINRA.

Launching Your Crowdfunding Campaign

Even if you are a tremendously successful owner or executive, a successful crowdfunding effort will require expert marketing surrounding your efforts to raise funds. You and the members of your management team will assume the responsibility of formulating a marketing campaign to drive potential investors to the funding portal containing your offering. You’ll need a good story about your offering to tell investors – complete with business plans, financial statements, and projections.

In the crowd, you’ll be competing for investment dollars with other companies so you need to engage in strategies to elevate your offering over all others. Earning the trust and confidence of investors can lead to a successful offering. Consider activities that could strengthen your relationships with clients, customers, and even vendors. These relationships may help to support a successful crowdfunding campaign and could represent your future investors.

To launch your crowdfunding campaign, you’ll be using the services of an SEC registered broker/dealer or SEC registered crowdfunding platform or funding portal. Each will probably offer different services and fee structures.  Once your customers, clients, and vendors have invested in your business, you may want to reach out to a broader base of potential investors. Getting your offer in front of the right investors will be critical to achieving your capital raising goals.

As a private company, you may not be accustomed to sharing operational and financial information publically. A successful crowdfunding campaign may require additional transparency if you are to build trust and confidence in prospective investors.  If you are not comfortable sharing company information with the world, you may want to explore a more proprietary method of raising capital.

Once you have executed a successful crowdfunding campaign, you will need to have a plan on how you will continue to communicate to your new investors.  How much information are you willing to share?  Which rights to information will investors have?  Consider creating an investor-only section on your company’s website where you can post periodic information about your company’s progress, financial results, etc.  Transparency is the key if you want to keep your investors informed and hungry to make additional investment in the future.

Proceed with Caution
CohnReznick supports capital formation whether it comes through the public markets, through private equity or venture capital, or from individual investors.  We do believe, however, that a solid balance must be maintained between fueling the needs of growth oriented businesses and providing oversight to protect investors eager to support the next generation of innovation.

As with any form of capital, we recommend that issuers consider the opportunities, challenges, and risks associated with offering and selling securities through crowdfunding.  We also advise investors to perform an appropriate level of diligence before making any investment decision.

For more information on the regulations pertaining to crowd funding, visit sec.gov.


Castelli_AlexWith more than 25 years of experience, Alex Castelli serves as CohnReznick’s Technology and Life Sciences Industry Practice Leader. Additionally, he is Co-Leader of the Firm’s National Liquidity and Capital Formation Advisory Group and a member of the Firm’s Public Companies Group. Providing audit, accounting, tax, and advisory services, Alex primarily manages commercial enterprise engagements and services privately held companies, investor-backed companies, early and later stage companies, and SEC reporting companies.

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