Best Practices

Tips for Raising Startup Funds with Crowdfunding

Published Aug 29, 2012 by

In the past, most startups' seed funding came from family members and friends, or from angel groups (groups of wealthy individuals who provide capital for a startup).  Crowdfunding, however, has made it possible for startups to raise capital by getting small amounts of money from a large number of investors.

The Jumpstart Our Business Startups (JOBS) Act, signed into law on 5 April 2012, has changed a few important aspects of crowdfunding. As Catherine Clifford explained in her article "The JOBS Act: What You Need To Know," crowdfunding had previously been "restricted to artists and business owners accepting small donations in exchange for things like tote bags and CDs". Thanks to the JOBS Act, small businesses can now exchange equity in their company for startup funds from non-accredited investors, or "regular Joes," who invest their own funds in the startup. 

In her article, "How to Attract Crowdfunding Investors Without Breaking the Law," Joy Schoffler explained that the JOBS Actalso 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 is 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.

Entrepreneurs looking to utilize crowdfunding may find it easier to find investors thanks to the new JOBS Act.  It is important, however, to keep the following tips from Clifford and Schoffler in mind when attempting to attract crowdfunding:

  1. Utilize social media and networking, but do not forget the value of professionalism, branding, and quality connections. Be professional in your posts, tweets, and blog posts and be sure to remove any content you would not be proud to show to potential investors.
  2. Build credibility Because investors will attempt to evaluate unknown companies by looking at their financial strength, Schoffler recommends making statements of current and projected financial conditions, as well as your company's risks, available to potential investors.  Positive online reviews and press attention can also go a long way in building your company's credibility. 
  3. Be diligent in assessing whether your investor's funds were obtained legally In her article, "Want to Raise Money With Crowd Funding? Consider These Tips," Clifford explains that if you accept money from an investor who obtained it fraudulently, you are legally required to pay that money back.
  4. Map out an investor relations plan so that you are aware of how many investor relations you and your startup can manage.  As Clifford points out, managing relations with dozens or hundreds of investors could become overwhelming.  Your investor relations plan should describe how and when you are going to communicate with investors and respond to their inquiries.  Your investors should be provided with this information so that they know what to expect. 
  5. Communicate the terms of the exchange clearlyTo avoid future confusion, Clifford recommends that startups establish the guidelines of the investments from their crowd ahead of time, preferably with the advice of a legal counsel or trusted mentor. Provide your investors with details about what they are receiving, how the price was determined, and what changes might occur in the future.  
  6. Be careful to avoid violating the JOBS Act by listing the terms of your offering outside of the accredited crowdfunding sites, or by making misstatements and omissions about your company.  As Schoffler explains, the punishment for doing so could include fines or even jail time. To avoid making these mistakes, business owners should refrain from citing the terms of their offer or overstating their results in social media posts and other public statements. 

Content contributed by Sarah Clement, State Of Ingenuity SourceLink.

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