Equity Crowdfunding – Harder Than it Looks

The Toughest Thing For Any Entrepreneur Is To Find Funding. Brilliant Ideas Abound But Funds Are Scarce.

Hiring lawyers to prepare a private placement memorandum is expensive and the money raise requires endless meetings and telephone calls to cobble together the full offering amount. Rewards crowdfunding (kickstarter.com, indiegogo.com) has exploded but its limiting.

Congress and the State of Michigan have both recognized that the business of raising money has been headed to the internet and both have passed legislation in an attempt to allow and encourage equity crowdfunding online.

Instead of getting a t-shirt or a record album, which are typical rewards when “investing” on kickstarter, an entrepreneur can now actual seek equity investors online. But the rules imposed by the government may have taken all of the fun out of the popcorn.

Isn’t there always a catch? There are many technical requirements under the federal rules so that counsel still needs to be involved. If you think you can save money by not doing a private placement memorandum, forget it. A similar document is still required to comply. All online solicitations also have to be made through a qualified internet portal. And most fun of all, what you thought was private, now has to be registered with the SEC so anyone can have access and watch what you’re doing or trying to do.

Michigan recently became only the fourth state to allow online equity crowdfunding, which applies to money raises primarily in Michigan. Again there are limitations, most notably that investments are limited to $10,000 for “non-accredited” investors (those who earn less than $200,000/yr and have a net worth of less than $1,000,000). Similar to the federal rules, a copy of the disclosure notice to investors has to be filed with the State so that a private placement is not necessarily private.

It remains to be seen whether equity crowdfunding will take-off. I have no doubt that there will be a number of adjustments from the legislatures over time. But for now, raising money over the internet still isnt’ easy.

Some equity crowdfunding sites include; earlyshares.com; ipovillage.com; GrowVC.com; EquityNet.com. But as I said, this is NOT the sort of thing that I would recommend doing without consulting with counsel. If you have further questions about equity crowdfunding or any related matters contact me atksilver@hertzschram.com.