Got a business you want to grow and possibly sell? Then you probably already know that Equity Crowdfunding is one of the smartest ways to grow your business fast!
The question is…how do you go about it? How can you Investment Crowdfund your small business, meet all the legal requirements and have investors support your company?
One of the catalysts of the Crowdfunding Law in the U.S., Sherwood Neiss said, “There are very few instances in history when we’ve had a start date for an entire industry that will disrupt the way the world looks at business. This is one of them. For the first time in 80 years, the average Jane and Joe have the ability to start a business with the help of the crowd or own a part of a friend’s American dream.”
Well, he is right. Once you know how Investment Crowdfunding works, growing your small business using this new asset class will become a cinch.
Introducing: How to Grow Your Small Business Using Investment Crowdfund
Everything you read in this post is backed up by the JOBS Act. Even though it took 4 years for the SEC (Securities and Exchange Commission) to Approve Title III, which made crowdfunding equity possible for everyone, the process takes time. Therefore, do not wait or procrastinate to get your company ready because preparation takes time and you want to be ready as soon as possible!
Don’t worry. There won’t be any jargon. The article uses plain and simple language, provides detailed examples, and gives you action plans that should help you prepare to Investment Crowdfund your company.
Sound interesting? We will cover the 3 most important subjects of the process. These are:
- How to Raise up to $1,000,000 in Yearly Funding
- How to Tap Into the Crowds Collective Power
- Three Steps to Increase Crowdfunding Investor Interest
How to Raise up to $1,000,000 in Yearly Equity-Based Crowdfunding Capital
If you want to raise money via crowdfund investing, you must grasp the statutory requirements set forth in the JOBS Act. Here are the key provisions that affect how small businesses and entrepreneurs can use this funding opportunity:
Title III Funding is limited to $1 million per year: This limit for crowdfund investing allows for sufficient seed money or early-stage investment for most businesses while avoiding the unintended consequence of having larger organizations use this asset class as an ATM.
Funding occurs on an all-or-nothing basis: This provision means that the entrepreneur or business determines upfront the financial goal for a crowdfund investing campaign, works diligently to accomplish that goal, and either succeeds and receives the full amount, or fails and receives nothing, despite whatever investment pledges have been made.
- Here are some key reasons that this provision exists:
- To be fair to investors: Business owners must be clear with investors about how much money they require and how that money will be used. If a business aims to raise $100,000 and promotes to investors what it will do with that money, it can’t possibly accomplish the same goals if it raises only a portion of that amount. An investor who pledges to support the $100,000 project shouldn’t be assumed to support a reduced version of it.
- To keep it lean: The all-or-nothing provision encourages entrepreneurs and business owners to think realistically and to set goals at the smallest level possible to be able to grow their businesses to the next level.
- To discourage fraud: If this provision didn’t exist, a fraudster could potentially go online, set up a bogus business pitch, and pocket whatever amount of money he could drive to his crowdfund investing page before being exposed. The crowd has power and intelligence, and it can sniff out fraudsters before they’re able to secure significant amounts of investment pledges. If a fraudster is able to get $1,000 in pledges toward a $20,000 campaign before he gets busted, for example, he doesn’t get the $1,000; he gets nothing. The all-or-nothing provision essentially grants the crowd time to sniff out the frauds.
There are crowdfunding regulations on how you can solicit funds: The Securities and Exchange Commission (SEC) regulates how you can direct people to your funding pitch (on your online portal) using Facebook, LinkedIn, Twitter, e-mail, and other online networks. Visit the SEC to find the most up-to-date information on the regulations at play. The SEC recently provided guidance for Title III issuers in the form of Compliance and Disclosure Interpretations. You can read it here.
- Before Filing: Before you file Form C (the disclosure document used in Title III) and get listed on a Funding Portal, a Title III issuer may not take any action that would “condition the public mind or arouse public interest in the issuer or in its securities.”
- No Demo Days
- No email blasts or social media posts about the offering
- No meetings with possible investors
- That means:
- After Filing: Once a Title III issuer has filed Form C and has been listed on a Funding Portal, any advertising that includes the “terms of the offering” is subject to the “tombstone” limits of Rule 204. The “terms of the offering” include the amount of securities offered, the nature of the securities, the price of the securities, and the closing date of the offering period.
Advertising that does not include the “terms of the offering” is not subject to Rule 204. Theoretically, for example, an issuer could attend a Demo Day after filing its Form C, as long as it didn’t mention (1) how much money it’s trying to raise, (2) what kind of securities it’s offering, (3) the price of the securities, or (4) the closing date of its offering.
*DISCLAIMER: I AM NOT an attorney, accountant or government employee. I am not giving you legal, financial or business advice here. If you decide to pursue any of the strategies I’m about to show you, it’s 100% your responsibility, and it’s up to you to seek legal, financial and professional advice. It’s also up to you to follow the law with your business and your marketing.
Only SEC-registered websites and broker-dealers can host crowdfund investing campaigns:
The JOBS Act mandates that anyone looking for crowdfund investments must do so via an SEC-registered website or, in some cases, through a broker-dealer. The websites, known as funding portals, help the SEC make sure that a company seeking funds has disclosed as much information as possible so investors can make informed decisions. They also prevent a company from getting any of the funds unless it hits its stated campaign goal. If you’re going to seek crowdfund investment support, you must use one of these SEC-registered websites (or a broker-dealer). Doing otherwise will land you in trouble.
*Info taken from “Crowdfund for Dummies” Cheat sheet
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How to Tap Into the Crowd’s Collective Power
It’s common knowledge that small businesses have been nudged out of the capital markets. After the financial collapse of 2008, if you were a small business owner or entrepreneur and tried to get a bank loan, they would request 3 years of financial statements plus enough assets to guarantee the loan.
If you were a startup, the picture was even grimmer. You did not have financial statements, so borrowing became an impossible task. Credit card interests rose. Credit limits were slashed. If you needed money to start a business or your company needed funds to expand, you were out of luck…so what was an entrepreneur to do?
How could you raise funds and have people gladly help you with it?
The Power of the Online Crowd
If you really think about it; charitable causes such as NPR, Cancer Walk, or other donations are really crowdfunding. President Obama’s campaign was a form of crowdfunding. He raised over $50 million from over one million followers.
Even Governments in the Middle East started to get toppled because of a Tweet (Egypt). Or thousands of people can get rallied around a cause to promote an idea (Occupy Wall Street.)
It was just a matter of time this crowd power reached the financial markets. Now instead of being able to give your money to a good cause, you can actually give it to own shares of a company.
No, I am not talking about the Stock Market; I am talking about Main Street businesses, right on your own neck of the woods!
Crowdfund investing is essentially creating a new set of investors: micro-angel investors. Before the JOBS Act, accepting $ 100 from a small investor was way too complicated to have been worth it. (The regulations just didn’t allow for it.) Now, a business owner has a platform for raising funds in such increments, and every $ 100 or $ 500 or $ 1,000 investment can have a big impact on that business’s success.
Amazing, right? Before you were willing to give your own money without expecting anything in return and now for the same good cause you can actually expect a return back.
Keeping this discovery in mind, the only logical way to raise funds is to engage with people that have an emotional attachment to your business, service or product.
The heart is a powerful thing. So keep reading to learn how to do it
Choose the Right Crowd
The starting point of an Investment Crowdfund campaign is to get your closest advocated on board first…this means existing customers, your family members and friends, and anyone else who knows and trusts you.
What makes these people so special?
Research has shown that during an actual live Crowdfund Campaign, most investors will stay away until your funding has reached at least 30% funding. Now, this is critical because the sooner you reach this 30% funding, the faster your campaign will start picking up speed and not fizzle out and lose momentum.
When you want to raise money online, the sooner you start building an engaged crowd with people that understand, like and use or will use your product or service…the sooner you will reach that 30% and therefore the higher your chances of success
Build a Powerful Online Brand
Research done by existing donation-based crowdfunding platforms showed that most campaign that failed is because they did not know the owner. Not only you need to create a social presence, but you need to be seen as an expert. Just being in social media is not enough. You have to engage, embrace, talk, and communicate with your crowd long before you even take your baby live.
Let me explain.
When your campaign goes live, you want your campaign to start strong right out of the gate. You want to get immediate traction. If a potential investor sees your leadership and business as weak, lost, and confused…you’ll struggle to get that person on board. On the other hand, if the potential investor sees immediate interest and pledges, he will most likely want to share the news with other investors in his network.
Does that make sense? You must be wondering “so what do I do next?”
First and foremost, understand that when you take your company live to a Crowdfunding Campaign, you will already have had your fans rallied and ready to go.
Although you can’t directly solicit campaign funds in your existing store, on the phone, or in any way other than via the online funding portal, (see the previous post for the legal requirements) you can certainly inform your customers about your campaign.
Do you have a strong online social network today? Do you have hundreds of connections on LinkedIn and Facebook and hundreds or thousands of followers on Twitter? If not, you need to build your online presence before you start trying to raise money online via crowdfund investing.
3 Steps to Increase Equity Crowdfunding Investor Interest
Laying out the groundwork correctly is imperative for a successful Crowdfunding Campaign. Building your social media network and engaging with them is just the first step.
When you plan to seek business funding of any kind, you have to present a solid business plan and define your goals and financial needs.
The key to making people want to learn more about your idea is to be outstanding and concise in your executive summary.
You need to get across:
- Why you need to raise money
- What problem you solve
- How your problem makes money
- How you’ll use the money
- Why you’re the right person to do the job
I’m sharing this with you because this is a crucial phase in the crowdfunding life cycle. If you execute it right, you can minimize failure, prevent your campaign from fizzling out, and increase investor participation.
What else can you do? How can you create a satisfied investor who will be loyal to you and your company even after the campaign has concluded?
1. Conduct Market Research
When most small businesses get started, chances are the entrepreneur had a gut feeling or prior knowledge in the industry, or someone told him it was a good idea to start the business. Unfortunately, few businesses get started with the entrepreneur having validated the idea first.
To make your Crowdfunding go smoothly, you should aim at understanding the dynamics of your market. Essentially the who, what, when, where, how and why of starting a business.
Click here to learn how.
If you already have a business and it is stagnant, go back to the drawing board and treat it like a startup. You can answer these questions yourself, but the chances are you may be wrong. So it is best to ask people who one day may be your customers.
The key is for you to objectively listen to their answers. The problem is, many people discard what they are being told. They go ahead and build a business anyway, which ends up failing because the entrepreneur built something no one wanted. So don’t make that mistake.
Also, don’t forget the competitive landscape!
2. Show Investors Specific Problems You Can Solve
When people invest money in your business, the last thing you want them to think is “was this worth it?” To combat this, you should show each one of your investors that you created a solution that does not exist yet. Or you have a solution that is better than what exists in the market right now.
Picture a business owner that asks you to invest in their business. Would you do it blindly? Or would you pick it apart? Would you try to find holes? Second guess their claims? So make sure your claims are well founded and be ready to answer every question it is thrown at you.
As you may have guessed, if your business model is trying to show that your product/service is better than the competition…you will have to prove that you are the woman for the job. What makes you qualified? Why is your competition weaker than you? Going through this process will also help you clarify in your mind if you really have a business worth crowdfunding.
On the other hand, if you are creating something entirely new. Ask yourself: Does the problem truly exist? Is it big enough that requires a solution? Do customers actually want your solution?
So think about this. If you are solving a problem and you have come up with a solution, make sure you provide your investors with hard data. Data can be in different forms such as market research, prototype, your education, skills or experience. The more you can prove, the higher your chances of success.
…You will have investors nodding their heads with a “yes!”
3. Identify Your Target Market
This is a clear, business-winning decision. Nothing decreases investor interest more than being confused about who your target market is. After all, from the get-go, you should be building your social media network based on people who will be your potential customers and therefore your potential investors. If you approach the wrong crowd, they will not see the benefit of your product or service and your Crowdfunding campaign will fail.
Why does this work? For starters, you cannot solve everyone’s problems. You have to determine early on whose pain you are easing. Your target market is the potential customer who has the greatest need for your product — the person whose pain you have the best chance of easing. That person is most likely to spend money immediately to get what you’re offering.
Focusing on your target market will give you the greatest chance for success. You can turn your target market customers into your greatest marketing assets by delivering exactly what they need and expect.
Equity Crowdfunding: Wrapping It Up
- If you want to raise money via crowdfund investing, you must grasp the statutory requirements set forth in the JOBS Act. Make sure you comply with these regulations and you should be well on your way. Remember to always follow the law!
- The JOBS Act makes crowdfund investing possible by enabling business owners to communicate with anyone via their social networks (such as LinkedIn, Facebook, and Twitter) to find potential investors for their business or startup ideas. (subject to certain restrictions…follow the law!).
- If you already run a business and you’re looking to grow, you need to bring your existing customer base into your campaign. These are the people who know your business, your product, and you. As long as you’ve been treating them right and providing a good product or service, they’re very likely to want to support your efforts by becoming equity or debt investors. Just because you successfully built your social media network, it doesn’t mean the work is over. Your job is to turn your investors into adoring fans by clearly showing your goals, financial needs and how you will ease their pain.
If you follow these strategies, you should be well on your way. But remember to always follow the SEC rules!